DBRS Morningstar Confirms Citizens Financial Group at A (low) on Acq. Announcement; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Citizens Financial Group, Inc. (Citizens or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Citizens Bank, National Association (the Bank) including the Bank’s Long-term issuer rating of A. The trend for all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation and maintenance of the Stable trend reflects the incremental improvement in Citizens franchise following the announced acquisition of Investors Bancorp (Investors, unrated). Specifically, the combination enhances Citizens market share in the Mid-Atlantic region and is complementary to the previously announced HSBC branch acquisition. Upon close, the pro-forma financial results are expected to be immediately accretive to earnings per share and neutral to CET1 capital levels. In DBRS Morningstar’s view, the combination does not add incrementally to credit risk as both companies have a strong lending track record. However, as with all acquisitions, there are integration risks, especially for an acquisition of this size, and DBRS Morningstar notes that this follows closely the recently announced HSBC branch acquisition.

RATING DRIVERS
The successful integration of the recently announced acquisitions, the realization of transaction assumptions, including improved profitability metrics, and acquired customer retention, while maintaining a similar risk profile would result in an upgrade of ratings. While a downgrade is unlikely, a significant weakening in asset quality or financial performance or operational issues with integrations, would result in a ratings downgrade.

RATING RATIONALE
Citizens announced the acquisition of Investors for approximately $3.5 billion in cash and stock. The transaction is expected to close during 1H22, subject to Investors’ shareholders and customary regulatory approvals. The acquisition adds approximately $27 billion in total assets, $20 billion in deposits, and approximately 154 branches in the greater New York City and Philadelphia markets and across New Jersey. Overall, we view the announced acquisition as incrementally improving the franchise strength of Citizens through better scale and an enhanced presence in affluent, although highly competitive markets.

The Company has identified approximately $130 million in annualized cost savings, representing approximately 30% of Investors’ cost base and expects to incur integration costs of approximately $400 million (pre-tax). Citizens is not including any revenue synergies in its assumptions although these could be substantial as the Company rolls out its more significant product mix, including wealth capabilities, to Investors’ customer base.
Despite the impact of the current operating environment, both banks have been performing well in recent periods.
Additionally, both banks have exhibited strong asset quality through previous business cycles, and although the combination will incrementally increase Citizens exposure to CRE to 12%, or 19% including multi-family, of pro-forma loans, DBRS Morningstar views this as a highly manageable number. Indeed, DBRS Morningstar views the overall pro-forma loan portfolio as nicely diversified.

While Investors’ deposit funding profile is not as strong as Citizens’, the overall pro-forma deposit mix is not significantly changed and will allow Citizens the opportunity to lower the cost of funds over time. Meanwhile, the Company noted that the transaction is expected to be neutral to the CET1 ratio at closing.

Franchise Combined Building Block (BB) Assessment: Strong/Good
Earnings Combined Building Block (BB) Assessment: Good
Risk Combined Building Block (BB) Assessment: Strong/Good
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Capitalisation Combined Building Block (BB) Assessment: Strong/Good

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/382191

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings,

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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