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Citizens focuses on efficiency, has high hopes for student lending

Citizens FinancialGroup Inc. held its net interest margin fairly steady in the secondquarter of 2016 while continuing to focus on expenses.

During an earnings call with analysts, executives at the bankcalled attention to its efficiency initiative, which they said prioritizes expensemanagement and should offer around $100 million in benefits in 2017. In the secondhalf of 2016, savings from the initiative will help offset some costs that wereunforeseen at the outset of the year, CFO Eric Aboaf added.

Aboaf said the bank will use the $100 million impact to fundinvestments that boost topline growth, specifically in its fee-based businesses.The bank expects "broad-based" progress in fee growth in the third quarterof 2016, he added.

Citizens executives forecast expenses to be "reasonablyflat" for the remainder of 2016. The bank's adjusted efficiency ratio of 65%was 2% better than the year-ago period, according to Aboaf. Chairman and CEO BruceVan Saun predicted that the bank's efforts to produce operating leverage will helpthe company's efficiency ratio move toward its goal in the low 60s.

Aboaf said he anticipates strong loan growth in the third quarter.  "We think the loan growth will outrun thatslight NIM compression in the third quarter and provide a good uptick in NII,"he said.

In terms of credit quality, executives said that the outlookis positive for consumer and commercial lending. "We'll continue to monitorthe energy portfolio, but with the recent increase in energy prices, we are feelingokay about that," Van Saun said.

Executives specifically noted growth in student lending, whichled the bank's 7% year-over-year loan growth. Brad Conner, head of consumer banking,pointed out the bank is optimistic about the growth outlook for student lendingand expects to see continued momentum in the space. Conner said the student lendingspace shows indications of strong credit for both in-school and refinance products.Aboaf added that the "very high quality credit book" offers attractivereturns.

In a July 21 note, Evercore ISI's John Pancari pointed out thatCitizens' results indicate that the bank's stock should react positively due to"solid growth outlook, continued efficiency improvement, and intact credittrends."

The company reportedsecond-quarter net income applicable to common stockholders of $243 million, or46 cents per share. That compares to the $190 million, or 35 cents per share, inthe second quarter of 2015.