Buy Citizens Financial Stock. Its Shares Could Gain 29%.

These days, it’s nearly impossible for a bank to succeed without the scale to provide more than just loans and accounts to their clients. They need to offer digital banking so clients can manage their finances from home, and offer services that go beyond the basics to include wealth management and investment banking. For banks, these changes have advantages too, including the ability to reduce costly bricks-and-mortar branches in favor of an app, while creating strong fee-earning businesses to offset weaknesses when interest income is squeezed. That’s only feasible, however, when a bank is big—the bigger the better, as

JPMorgan Chase

(ticker: JPM),

Bank of America

(BAC), and others have demonstrated.

That hasn’t gone unnoticed by Citizens Financial (CFG). The Providence, R.I.–based bank dates its origins back to 1871 but only re-entered the public markets eight years ago, after Royal Bank of Scotland, which acquired it in 1988, was forced to divest its foreign holdings after the financial crisis. Since then, Citizens has moved beyond its beginnings as a niche regional bank to an institution that can sometimes compete with the big banks on deals.

To meet its goals, Citizens has been on an acquisition spree of late. It closed its acquisition of

HSBC Holdings

’ (HSBC) East Coast retail operations in February and its $3.5 billion takeover of New Jersey–based Investors Bancorp in April. Citizens also acquired JMP Group, an investment banking and asset-management firm, in 2021, proving that its buying streak wasn’t just about expanding the lender’s geographic footprint, it was also about diversifying its service offerings.

The change has been enormous. As recently as last year, the bank lacked a presence in the New York City and New Jersey metro areas, which made it difficult to serve the Eastern Seaboard. Now its green signs are common sights in the Big Apple. After the HSBC acquisition, Citizens has a geographic footprint spanning 14 states in the Northeast, Midwest, mid-Atlantic, and Florida as well as its boundary-less digital offerings. “Completing the Northeast contiguous footprint was really important to us,” says Citizens CEO Bruce Van Saun.

Citizens’ business lines have become more diversified as well. Before the IPO, the commercial side of the bank was focused on debt syndication and interest-rate products, forcing existing clients to go elsewhere for other financing needs. But in the past eight years—through organic growth and acquisitions—Citizens added equity and fixed-income underwriting, M&A advisory services, and other capabilities to its tool kit, allowing it to do more for its clients. Citizens’ acquisition of JMP only furthers its growth in capital markets and advisory services—particularly when it comes to the healthcare, tech, financial, and real estate sectors.

Still, getting bigger can be a tricky proposition, one that even CEO Van Saun acknowledges will take a lot of focus to make Citizens’ bets pay off. The worries are apparent in Citizens stock, which has fallen 18% this year including reinvested dividends, worse than the

SPDR S&P Bank
exchange-traded fund’s (KBE) 16% decline. But Citizens’ first-quarter earnings, reported April 19, helped alleviate some of those worries.

The bank reported a profit of $1.07, beating estimates for 91 cents a share, on revenue of $1.645 billion, just ahead of forecasts for $1.64 billion. While Van Saun says that Citizens could make more acquisitions—particularly in wealth management—it plans to spend the remainder of this year integrating its newest purchases. Citizens also said it would target a return on tangible common equity—a measure of profitability—in the range of 14% to 16% this year, down slightly from 16% in 2021.

“CFG now is embarking on the next leg of its journey,” RBC Capital Markets analyst Gerard Cassidy, who has an Outperform rating on the stock, wrote after the earnings release. “As it delivers on the integration of its deals, a peer group’s stock valuation would be warranted.”

Cassidy has a point. Citizens trades at 1.3 tangible book value, in line with its five-year average but lower than peers like

Fifth Third Bancorp

(FITB), and

Huntington Bancshares

(HBAN), which trade at 1.6 times. With a tangible book value of $32.91 expected in 2022, that would imply a target of $49 based on a tangible book value of 1.5 times, up about 29% from a recent price of $38.

Other valuation metrics also suggest more upside for Citizens stock. It currently trades at 8.3 times 12-month forward estimates of $4.47, below its own five-year average of 11 times while also lagging behind Fifth Third, which trades at 9.3 times, and Huntington, which trades at 8.9 times. If Citizens were to trade at a multiple between its two competitors, it would be worth $41, up 8% from recent levels. At its own five-year average, it would trade at $49, up 29%.

Citizens isn’t entirely in control of its own future, of course. Standing in the way of further gains: the Federal Reserve’s monetary policy, which has raised concerns about a possible recession. Still, with yields rising, Citizens expects its net interest income to be $300 million higher than last year based on where the yield curve—the difference between short- and long-term interest rates—stood then. The bank is also confident about its credit profile, noting that over the past few years it has been focused on lending to larger, better-capitalized companies.

If the market starts to cooperate, Citizens’ stock price—and not just its business—should get bigger too.

Write to Carleton English at [email protected]