Fee Income to Support Citizens Financial's Q3 Earnings Amid Lower NII

Citizens Financial Group, Inc. CFG is scheduled to report its third-quarter 2024 results on Oct. 16, before the opening bell. The company's earnings and revenues in the third quarter are expected to have declined from the year-ago reported figures.

In the second quarter of 2024, CFG's earnings missed the Zacks Consensus Estimate on lower net interest income (NII), a rise in provisions and operating expenses. However, an increase in non-interest income and lower allowance for credit losses offered some support.

The company's earnings missed the Zacks Consensus Estimate in each of the trailing four quarters, the negative surprise being 16.39%, on average.

Factors to Influence CFG's Q3 Earnings

Loans: The clarity on the Fed's rate cut path and the stabilizing macroeconomic backdrop are likely to have provided support to the lending scenario. According to the latest data from the Fed, the demand for commercial and industrial and consumer loans was modest in the first two months of the quarter, while demand for commercial real estate remained subdued.

The company's lending book is likely to have been positively impacted by improvement in commercial loans, while the subdued real estate loan demand might have offset growth to some extent.

The Zacks Consensus Estimate for average interest-earning assets is pegged at $199 billion, indicating an increase of nearly 1% from the prior quarter's reported figure. We estimate the metric to be $212.5 billion.

Net Interest Income: On Sept. 18, the Federal Reserve cut interest rates by 50 basis points to 4.75-5% for the first time since March 2020. While this development might prove to be helpful in the long term, it is not expected to have a positive impact on CFG's NII during the third quarter.

Also, relatively higher rates might have hurt NII growth prospects similar to the last quarter due to the elevated funding/deposit costs and an inverted yield curve during the major part of the quarter.

Management expects NII to be down 1-2% in the third quarter compared with the second quarter's reported figure of $1.41 million.

The Zacks Consensus Estimate for NII is pegged at $1.39 billion, indicating a 1.7% decrease from the prior quarter's reported figure. Our estimate for the metric is pegged at $1.38 billion.

Non-Interest Income: As the central bank lowered the interest rates, mortgage rates started to come down. The rates declined to almost 6.2% by the end of the third quarter. Although mortgage origination volume remained subdued in the quarter under review, refinancing activities witnessed a significant surge supported by lower mortgage rates. This is likely to have supported CFG's mortgage banking fees.

The Zacks Consensus Estimate for mortgage banking fees is pegged at $55.9 million, indicating a 3.5% rise from the prior quarter's reported figure. Our estimate for the metric is pegged at $62.1 million.

Decent client activity and impressive equity market performance are likely to have boosted the company's trust and investment services fees. The Zacks Consensus Estimate for trust and investment services fees is pegged at $77.8 million, indicating a 3.7% increase from the previous quarter's reported figure. Our estimate for the metric is pegged at $73.9 million.

Global mergers and acquisitions in the third quarter of 2024 showed improvement after subdued 2023 and 2022. Both deal value and volume were decent during the quarter, driven by solid financial performance, higher chances of a soft landing of the U.S. economy, buoyant markets and interest rate cuts. However, tough scrutiny by antitrust regulators and lingering geopolitical issues are likely to have affected the company's capital markets fee.

The Zacks Consensus Estimate for capital markets fees is pegged at $120.9 million, indicating a sequential decline of 9.8%. We estimate the metric to be $108.6 million.

Citizens Financial's efforts to enhance deposit balances on the back of past strategic acquisitions are likely to have aided service charge and fee revenues in the quarter under review. The Zacks Consensus Estimate for the service charge and fee revenues is pegged at $107.8 million, indicating a rise of 1.7% from the prior quarter's reported level. Our estimate for the metric is pegged at $111.1 million.

The Zacks Consensus Estimate for card fees is pegged at $89.4 million, indicating a sequential decline of 2.7%. We estimate the metric to reach $86.6 million.

Management expects fee income in the third quarter to be slightly up compared with $549 million in the second quarter. Further, the Zacks Consensus Estimate for the metric is pegged at $553.3 million, indicating a marginal sequential increase. Our estimate for the metric is pegged at $556.2 million.

Expenses: Citizens Financial's expenses are expected to have flared up in the quarter under review on the opening of private banking offices, franchise expansion, as well as investments in newer technological advancements.

Management projects adjusted non-interest expenses to be stable in the third quarter compared with the second-quarter 2024 level of $1.27 billion.

Asset Quality: The company is expected to have set aside substantial money for potential bad loans, especially commercial loans which accounted for 50.7% of total loans and leases as of June 30, 2024, given the expectations of an economic slowdown.

The Zacks Consensus Estimate for non-accrual loans and leases is pegged at $1.54 billion, indicating a rise of 1.2% from the previous quarter's reported figure. Our estimate for the metric is pegged at $1.51 billion.

What Our Model Unveils for CFG?

Our proven model predicts an earnings beat for Citizen Financial this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the odds of an earnings beat. That is the case here, as you can see below.

Earnings ESP: Citizens Financial has an Earnings ESP of +0.31%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for third-quarter earnings has remained unchanged in the past seven days at 78 cents per share. It suggests a year-over-year decline of 8.24%.

The consensus estimate for quarterly revenues of $1.94 billion indicates a 3.6% decline from the prior-year quarter's reported figure.

Other Stocks to Consider

Here are some other bank stocks that you may want to consider, as our model shows that these, too, have the right combination of elements to post an earnings beat this time around:

First Horizon Corporation FHN has an Earnings ESP of +3.18% and carries a Zacks Rank #3 at present. The company is scheduled to release its third-quarter 2024 earnings on Oct. 16.

FHN's quarterly earnings estimates have been unchanged over the past 60 days.

The Earnings ESP for M&T Bank Corporation MTB is +0.49% and it carries a Zacks Rank #3 at present. The company is slated to report its third-quarter 2024 results on Oct. 17.

Over the past seven days, the Zacks Consensus Estimate for MTB's quarterly earnings has remained unchanged in the past seven days.

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