Monday, 23 March 2015

Citizens Financial Group - look for the opportunity not the threat in a big placing

It was six months ago that I last wrote exclusively about Citizens Financial Group the US$13bn+ market cap regional bank that used to be a fully-owned part of the RBS financial empire.  I say 'used to be a fully-owned part...' as the inspiration for a posting last September was the event of their separate listing on the US stock market as a minority free float spin-off.  Since then the shares have pushed up solidly - good news given that I bought the stock early in its stock market life and included the name in my preferred stock list for 2015 (link here).

As I have chronicled via a number of updates on Voya (the ex ING US business) it is inevitable that these businesses do trade at a discount to some semblance of full/fair value due to the existence of a share overhang which periodically gets placed.  No surprises then to read today that RBS have decided to place some stock (I have highlighted certain aspects of their statement of particular interest): 

'The Royal Bank of Scotland Group plc ("RBSG") today announces it intends to sell part of its shareholding in its subsidiary Citizens Financial Group Inc. ("CFG" or "Citizens") in an underwritten public follow-on offering ("the Offering").

The Offering is expected to comprise 115 million shares of Citizens' common stock, equivalent to 21% of CFG's common stock excluding an over-allotment option. A further 17.25 million shares will be made available by RBSG under a 30 day over-allotment option.

If all the CFG shares made available in the Offering are sold, assuming no exercise of the over-allotment option, RBSG's remaining stake would comprise 269.7 million shares, equivalent to 49.3% of CFG's issued common stock. If the over-allotment option is exercised in full, RBSG's remaining stake would be 252.5 million shares or 46.1% of CFG's common stock'

So should Citizens Financial investors panic?

Of course noted above the likelihood of this was of an almost certain probability.  

Looking at January's Q4/FY results the company is sensibly financed and positioned...

...with sensible / achievable growth targets for FY15e supplemented by ongoing cost cuts.  As always with a spin-off the scope for the newly liberated incumbent management team to deliver stronger performance versus the prior 'empire' owner.

If you put all of that together then I am not surprised that rolling the RoTE number forward a year or two sees a sharp (anticipated) improvement.  
And the implication for a 'fair' target share price?  Certainly something in the US$26/27s, possibly even closer to US$30.  Of course some element of a discount has to be applied to this given today's placing and the high likelihood that RBS totally exits (to support their own capital position improvement hopes) but my observation would be any share price shift notably below Friday's closing level in the mid US$24s is more of an opportunity than a threat. 

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