Citizens Financial climbs after raising $3B in U.S. IPO

BRUCE VAN SAUN, is the CEO of Citizens Financial Group. Citizens raised $3 billion in its initial public offering, pricing the shares below the marketed range. / PBN FILE PHOTO
BRUCE VAN SAUN, is the CEO of Citizens Financial Group. Citizens raised $3 billion in its initial public offering, pricing the shares below the marketed range. / PBN FILE PHOTO

(Updated, 5:20 p.m.)
NEW YORK – Citizens Financial Group Inc., the U.S. subsidiary of Royal Bank of Scotland Group PLC, gained 7.3 percent after raising $3 billion in its initial public offering.

Citizens climbed to $23.08 in New York trading after the IPO priced at $21.50 a share. RBS sold 140 million shares below the marketed range of $23 to $25, according to a statement Tuesday. That still makes Citizens the second-largest IPO in the U.S. this year after Alibaba Group Holding Ltd.’s $25 billion deal last week.

The IPO frees RBS of unwanted assets as it adjusts to stiffer capital rules and seeks to recover funds after receiving the biggest bank bailout in history during the financial crisis. Citizens, run by CEO Bruce Van Saun, lags behind U.S. regional bank peers and is seeking to double its return on equity in the next two to three years.

“The one area where we’ve been short on historically is our financial performance,” Van Saun, 57, said today in a phone interview. “We have a very good plan that investors reacted very well to, but there’s a lot to execute on that plan and the pricing reflects the risk of execution.”

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Citizens valued itself at a discount to other U.S. regional banks. At the IPO price, the Providence-based lender has a market value of $12 billion and is valued at 0.9 times net tangible book value. That compares with an average of 1.91 times book value for U.S. banks with a market value of more than $1 billion, data compiled by Bloomberg show.

Relative value

“This bank is behind the curve in terms of improving profitability,” Terry McEvoy, an analyst at Sterne Agee & Leach Inc., said before the IPO. “You would expect the stock to be priced and valued appropriately.”

RBS still owns a 75 percent stake in the U.S. lender. Citizens, which has 1,230 branches in 11 states, didn’t receive any of the proceeds from the IPO.

RBS rose 1.2 percent to 362.10 pence Wednesday in London trading and has gained 5.9 percent this year. The European Commission has given Edinburgh-based RBS until Dec. 31, 2016, to sell the rest of its stake in Citizens with a possible 12-month extension depending on market conditions, according to a regulatory filing. The bank isn’t allowed to sell any additional shares until the end of its 180-day IPO lock-up agreement.

“The reduced sale proceeds may take some of the froth out of the RBS ‘bull’ case,” Ian Gordon, a London-based analyst at Investec PLC who has a hold rating on the shares, said in a note. “Perhaps the bigger picture is that an anticipated capital uplift of 2 to 2.5 percent should still follow. Capital repair should no longer be seen as a material challenge.”

ROE trails

Gordon estimated RBS is losing about $300 million on the Citizens disposal, which will be recognized when the British bank reduces its stake below 50 percent over the next two years.

RBS CEO Ross McEwan, who created a “bad bank” last year to house the riskiest assets, is focusing on the company’s U.K. consumer and business unit, as well as seeking to boost capital levels to comply with new regulations. The British government still owns 80 percent of the lender.

Citizens’ return on equity was 5 percent last year, compared with 10.7 percent at PNC Financial Services Group Inc. and 13.4 percent at Fifth Third Bancorp, according to data compiled by Bloomberg.

Citizens plans to cut costs, boost revenue, reduce capital ratios to levels consistent with peers and benefit from a potential increase in interest rates, according to a Sept. 8 regulatory filing. As it expands its commercial banking business, Citizens said it plans to add jobs and specialties in industries including health care and technology. The firm, which was acquired by RBS in 1988 and traces its history to 1828, has $130.3 billion in assets.

‘More risk’

“This plan starts to allow us to grow the balance sheet and take on a little more risk in certain areas that weren’t consistent with RBS’ broader agenda,” Van Saun said. “The comeback story will be that it was a well-crafted plan.”

Net revenue at Citizens rose to $1.47 billion in the second quarter from $1.17 billion in the prior three months. The bank’s efficiency ratio, a gauge of management’s ability to control costs, improved to 64.4 percent from 69.5 percent during that time, according to data compiled by Bloomberg.

Citizens becomes a public company as record-low interest rates pressure bank profits. While higher rates can help boost profits by allowing lenders to make more money on loans, it can also hurt earnings if borrowing costs rise before the loan yields increase.

Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. managed the offering. The stock is listed on the New York Stock Exchange under the symbol CFG.

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