Citizens Financial Group,

a large regional bank based in Providence, RI, has one of the hottest credit niches in the world. The bank is the exclusive financial partner for iPhones purchased directly from


With more than half of all iPhone buyers opting for installment plans, Citizens’ Apple wallet has grown from zero in 2015 to around $ 1 billion earlier this year.

Initiatives like this are helping Citizens (ticker: CFG) show steady growth in its total loan portfolio at a time when many rivals are struggling for any growth. Fierce competition and rising interest rates will likely keep regional bank lending growth below 1% this year, but Citizens is on track for almost 4%, according to Wedbush Securities analyst Peter Winter . And by all indications, the bank is adding these loans with caution and profit.

Investors don’t seem to understand how well things are going for citizens. The bank’s shares have fallen 13% this year, compared to 6% for the KBW Bank index. At a recent $ 36, Citizens is now trading at 1.3 times its tangible book value, or book, compared to 1.8 times for regional banks as a group. All of this makes citizens look like a bargain.

Morgan stanley

Analyst Ken Zerbe sees the stock heading towards $ 51, a gain of over 40% from its recent price. In addition, the stock offers a good dividend yield of 3.1%.

Citizens, with a market value of $ 17 billion, is one of the 20 largest banks in the United States, according to S&P Global Market Intelligence. With branches in 11 New England, Mid-Atlantic and Midwestern states, it is a formidable player in personal and business banking.

E = Estimate

Sources: Bloomberg; corporate reports

The bank was split from

Royal Bank of Scotland

during an initial public offering in 2014. After the missteps that led to the global financial crisis ten years ago, RBS was bailed out by the British government, which ended up with a majority stake . As a result, citizens suffered from underinvestment.

But his fortunes have improved markedly under the leadership of CEO Bruce Van Saun, a seasoned banker who has been in charge since 2013. He has put Citizens on a solid financial footing, with high capital ratios, and led a campaign of successful recruitment. “He’s been able to attract a lot of talent from other banks,” says Winter.

Van Saun, whose 35-year career in financial services included managerial positions at

Bank of New York Mellon


German Bank,

succinctly sums up its game plan: “provide positive operating leverage, which means we are growing our revenues faster than our expenses”. In fact, income for the first nine months of this year increased 7%, while non-interest expense increased 4%.

This has made citizens much more profitable than before. Return on tangible common equity was 13.5% as at September 30, down from 4.3% in the third quarter of 2013 and approaching the industry average of around 16%. The bank has consistently beaten earnings estimates since going public. It reported third quarter earnings of 91 cents per share on Friday, down from 68 cents a year earlier, beating the consensus of 89 cents.

So what is it that drives the stock down? Some investors fear that Citizen’s loan growth will end badly when the economy finally recedes. This has certainly happened to many growing banks in the past. But Citizens is far from being on an unsustainable tear. The increase in its loan portfolio this year, although better than that of its competitors, has actually slowed from the 5.7% pace last year, and is expected to average 4.5%. over the next two years. “They’re increasing loans very consistently,” Morgan Stanley’s Zerbe says. And so far, the credit quality has held up well. Nonperforming loans total 0.73% of the entire portfolio, up from 0.85% a year earlier.

Another concern with Citizens is that it lags its peers in generating commission income, which may be more predictable than interest income from loans. Fees were only 27% of Citizen’s third-quarter revenue, compared to around 40% for its peer group.

But Citizen’s non-interest income, primarily fees, rose 9% year-over-year in the third quarter, and Van Saun is set to increase it further. In August, he completed a $ 511 million acquisition of Franklin American Mortgage, significantly strengthening Citizens’ home loan services business. Repairers earn regular commissions by funneling monthly mortgage payments from homeowners to mortgage securities from investors.

Meanwhile, Citizens continues to refine its lending strategy. It has moved away from risky markets like auto loans and into promising niches like refinancing student loans for young professionals. These borrowers are much less risky than students who go into debt while studying. Citizens held $ 8.7 billion in education loans as of September 30, up 9%.

It is also making its mark in unsecured merchant finance loans, such as the Program with Apple (AAPL). Citizens offers 24-month installment loans for iPhones sold directly by Apple; qualified customers can upgrade their phones after 12 payments.

Citizens has also reorganized its business operations, with almost half of its loan portfolio now in this category. Targeting companies across the United States with annual sales of up to $ 3 billion, she added expertise in specialties such as mergers and acquisitions and foreign exchange consulting.

The large dose of commercial loans, which are usually reset periodically, make the bank quite susceptible to interest rate hikes, so it should benefit from further Federal Reserve tightening. The citizens’ net interest margin – the difference between yields on loans and the cost of funds – climbed to 3.19% from 3.05%.

There could be more good news for investors. Analysts expect the bank’s dividend to hit 98 cents per share this year, up 53% from last year’s payout, and then as high as $ 1.31 next year. In summary, given Citizens’ outlook, its Apple connection, and the modest stock price, the stock offers investors a good chance of raising dollars.

Write to Lawrence C. Strauss at [email protected]