Citizens Financial Group Inc.'s latest deal is in line with its plans to boost fee income and deploy its cache of excess capital, analysts say.
The Providence, R.I.-based bank, with $153.45 billion in total assets, is buying the assets of Franklin, Tenn.-based Franklin American Mortgage Co. Inc. for $511 million in cash, or 1.1x tangible book value. It marks the fourth-largest instance of a bank making a financial services acquisition since 2016, an S&P Global Market Intelligence analysis found.
The deal is "right in the sweet spot of our strategy," Citizens Financial CEO Bruce Van Saun said during a May 31 conference hosted by Sanford C. Bernstein. The bank's management could not be reached for additional comment.
Scott Siefers, a Sandler O'Neill & Partners analyst, wrote that the deal is not surprising, since Citizens Financial has been transparent about its interest in fee-based acquisitions.
Siefers wrote that the deal provides immediate scale to Citizens' mortgage business, more than doubling originations on a combined basis and nearly tripling Citizens Financial's servicing portfolio. Franklin American Mortgage managed a $41.4 billion mortgage servicing portfolio and generated about $13.7 billion in annualized originations during the first quarter of 2018, according to Citizens Financial.
The analyst wrote that the bank has been "doing its best" to grow its mortgage business organically but has struggled to generate the volume of business it has hoped for. "Purchasing this large platform should resolve this issue immediately," Siefers said in a research note.
Peter Winter, an analyst for Wedbush Securities, said mortgages are one of the bank's core fee income businesses, along with wealth management and capital markets. Winter said he is concerned about the current state of mortgage originations, due to less refinancing activity and housing supply. But the deal's large mortgage-servicing portfolio makes it attractive, he said in an interview.
"In a rising-rate environment, mortgage servicing should do well and offset some of the weakness in mortgage origination," Winter said. "What's important about this deal is [that] a bigger component of the revenues is from mortgage servicing."
Keefe Bruyette & Woods analyst Brian Klock said the transaction checks a few boxes for the bank.
"It's a capital-efficient deal that doesn't have that much of an impact on regulatory capital or tangible book value," he said in an interview. "It's accretive to earnings — most asset acquisitions or fee-type businesses are."
"It also fits in with one of [Citizens Financial's] strategies and goals, when they went public a few years ago, to get a bigger contribution of fee income," he added.

The deal announcement comes about a year after Citizens Financial Group's subsidiary Citizens Capital Markets Inc. agreed to acquire Cleveland-based M&A advisory shop Western Reserve Partners LLC, a deal intended to boost fee income as well as expand the bank's exposure to the M&A business. During the first quarter of 2018, Citizens Financial reported a 1% increase in net interest income from the previous quarter and a 9% year-over-year increase.
The bank still has "a lot more excess capital" compared with its peers, which it could return to shareholders through stock buybacks or deploy through more M&A, Klock said. During his conference presentation, Citizens Financial's Van Saun hinted that the bank could look to acquire assets in the wealth management space.
Citizens Financial appears to be comfortable with the commercial side of its business, Klock said, and he does not expect the company to look for traditional bank M&A deals.
"It's not going to be a franchise-changing acquisition," he said of a hypothetical next target for the bank. "Just something that fits in with a certain niche and somewhere that they're building out. The fee income side is where you could see more opportunities for Citizens."
