Big Expectations For Citizens Financial Group Inc IPO

The 2014 trend of strong IPOs looks to continue with the launch of Citizens Financial Group Inc CFG.

Synchrony Financial SYF raised $2.8 billion in July, making it the largest U.S. IPO for 2014 before being unseated by Alibaba Group Holding Ltd BABA last Friday. Citizens Financial Group plans to raise $3.4 billion in its IPO, making it the largest banking sector IPO since Goldman Sachs Group Inc GS in 1999.

Nate Tobik, founder of CompleteBankData.com and oddballstocknewsletter.com said on #PreMarket Prep that, "this could be potentially one of the biggest IPOs of the year. Even bigger than Alibaba. Banks have really been pushed down for years, really since 2008."

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Citizens Financial is currently owned by the Royal Bank of Scotland Group plc RBS. After receiving £45 billion in 2008, the company is looking to divest itself in an effort to reorganize and reduce costs. According to a press release, CEO Ross McEwan said of the offering, “The planned divestment will significantly improve RBS’s capital foundation and is a further important step in making RBS a strong and secure bank that continues to fully support the needs of its customers.”

RBS is selling 25 percent of Citizens Financial, with all the proceeds going back to RBS for repayment of the bailout.

About Citizens Financial Group

Headquartered in Providence, Rhode Island, Citizens Financial is the 13^th-largest retail bank in the United States with $130.3 billion worth of assets. The bank operates 1,230 branches and 3,215 ATMs to service 29.9 million households across 11 states in New England, the Midwest and the Mid-Atlantic regions of the country.

For the 12 months ending June 30, 2014, the company generated $5 billion in revenue across its consumer banking and commercial banking segments. Consumer banking accounts for 56 percent of revenue and commercial banking makes up 44 percent.

Citizens Financial's revenues for 2011, 2012 and 2013 declined at a -2.3 percent pace, year over year. Revenues fell from $5 billion in 2011 to $4.7 billion at the end of 2013.

The bank’s assets and deposits have remained steady since 2010. Assets for 2010 are listed as $129 billion, and as of June 30 are listed as $130.3 billion; deposits were $92.2 billion, and as of June 30 remained nearly flat at $91.7 billion.

As defined by Basel I standards, the bank is better capitalized than the majority of other banks. The median 2014 Tier 1 common equity ratio is 8.2 percent. Banks like Bank of America, Citigroup and JP Morgan all have Tier 1 ratios between 6 and 8 percent. Citizen’s Tier 1 common ratio as of June 30 is 11.1 percent.

Despite the stagnant financials, Tobik pointed out that there is an upside for investors.

"I think this will be good for the bank," Tobik said. "You’ve got a motivated CEO, the bank is now partially owned by shareholders, and they’re going to work to increase profitability. He [the CEO] said he wants to double ROE in the next couple years. If that happens, there is no way this will trade at one times tangible book."

Pricing Information

Citizens Financial expects to price its IPO in Wednesday's after-hours session or Thursday's premarket session. Underwriters Morgan Stanley, JP Morgan and Goldman Sachs expect to price the 140 million share offering between $23 and $25 per share. It will trade on the NYSE under the ticker, "CFG."

Disclosure: At the time of writing, the author holds no positions in the mentioned securities.