Citizens upbeat on mortgages despite revenue slide

Mortgage banking revenue at Citizens Financial Group fell sharply during the second quarter after a surge sparked by low interest rates, strong margins on the sale of home loans and a boom in house purchases.

Fee income from mortgages totaled $85 million in the second quarter, compared with $276 million in the same quarter last year. The decline stemmed largely from lower gain on sale margins, as competitors ramped up their capabilities to sell mortgages on the secondary market.

Citizens’ 2018 purchase of Franklin American Mortgage in Tennessee had put the company in a good position to benefit from low rates and the strong demand for homes during the COVID-19 pandemic. Even though mortgage revenues fell back to prepandemic levels during the second quarter, purchase volumes remained strong.

Chairman and CEO Bruce Van Saun was upbeat about the mortgage business, while acknowledging that Citizens previously benefited from much higher gain on sale margins following the acquisition of Franklin American.

“We also warned that in the first half of the year, those are going to come back to earth,” Van Saun said in an interview Tuesday. “The mix is moving from [refinance] more to purchase, and we’re well positioned to play in the purchase space, particularly with our retail channel.”

Citizens’ net income more than doubled from the second quarter of 2020 to $648 million, driven largely by a negative provision for credit losses. Earnings per share of $1.44 was 33 cents higher than the mean estimate of analysts polled by FactSet Research Systems.

Total revenue at Providence, Rhode Island-based Citizens fell 8% to $1.6 billion. Net interest income declined 3% to $1.1 billion, and the company’s net interest margin contracted 16 basis points to 2.72% on lower rates.

Total noninterest income fell 18% to $485 million, driven largely by the decline in mortgage banking income, which took hits from a $26 million decline in the valuation of mortgage servicing rights and a $10 million increase in mortgage agency fees late in the quarter.

Growth in other fee income categories softened the impact. Card fees rose 33% to $64 million as consumer spending returned. Capital markets fees increased by 49% to $91 million, driven by growth in loan syndication fees and merger and acquisition advisory fee income.

The $185 billion-asset Citizens has added three boutique M&A advisory firms to its capital markets business in recent years, and the company benefited from increased M&A activity among some of its middle-market clients.

“We’re seeing lots of opportunities to help companies who want to sell themselves or sell a division or help a private equity sponsor put money to work,” Van Saun said.

In some cases Citizens has also been able to win additional wealth management business from clients who sold a business or piece of their business, he added.

While Citizens remained characteristically tepid on the prospect of buying banks, the company continues to look for nonbank acquisitions that would add to its fee generating businesses, according to Van Saun.

Wealth management firms and boutique M&A advisory shops “in the right industry verticals” remain at the top of the list, although Van Saun also expressed interest in adding new lending or payments capabilities.

He added that some potential target firms have expressed interest in selling their businesses sooner than later, given discussions in Washington, D.C., about raising capital gains taxes. That could present an opportunity for Citizens.

“I’m hopeful we’ll be able to get something done this year,” Van Saun said.

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