Would you like to invest in “buy now, pay later” with less risk? Try this stock



Recently, Citizens Finance Group (NYSE: CFG), a major regional bank with $ 187 billion in assets based in Rhode Island, announced that it plans to expand its relationship with the point-of-sale, buy-now-pay-later (BNPL) Microsoft (NASDAQ: MSFT). BNPL has been all the rage lately, with companies like Confirm (NASDAQ: AFRM) lead to enormous reviews within a very short time.

However, being a large regional bank, Citizens’ stock allows people to get exposure without the same risk that has recently led to a big sell-off in high-growth technology stocks. Let’s see how Citizens provides that exposure with more stability.

Builders pay

Investors view Citizens as a more traditional bank stock, not that the bank hasn’t gotten much more innovative over the years from a digital banking perspective. The bank has a large portfolio of commercial loans and other fee-paying businesses such as investment banking and wealth management.

Over the years Citizens has worked to build a more diversified consumer portfolio that includes high yield digital savings accounts, mortgage, home equity, student loans, and a growing BNPL portfolio. In the long term, Citizens wants to build a national digital consumer bank that better integrates and markets all of these products together.

Citizens Pay, the bank’s BNPL and point-of-sale offering, essentially allows people to take out 12 to 18 month interest-free installment loans for purchases and pay them off over time. The other nice thing about this product is that once a customer makes a purchase on Citizens Pay, no additional credit checks are performed on future purchases.

Image source: Getty Images.

Citizens has forged some important partnerships over the years, and Citizens Pay can be used at many large retailers, such as Best buy, Walmart, aim, and GameStop. The BNPL portfolio has a total credit balance of up to $ 4 billion to $ 5 billion on the balance sheet and is currently showing a nice return of 7.15% on the portfolio. During the bank’s third quarter conference call, Citizens CEO Bruce Van Saun said that BNPL balances were up about 40% year over year.

With the expansion of the partnership with Microsoft, customers on Microsoft.com can purchase all Microsoft hardware such as the new Surface Pro or Xbox system as well as accessories and subscription services via the Citizens Pay platform.

The advantages of a large bank

If you look at the past month, the fast growing fintech Affirm has been hammered and is down more than 31%. Meanwhile, Citizens’ stock has held steady, up 35% since the start of the year. Since Citizens is a bigger bank that has a lot of other businesses, it trades much more stably than a stock like Affirm.

Fintechs were largely sold last month as investors worried about the Omicron variant and higher inflation, which led the Federal Reserve to abandon the word “temporarily” on inflation. It also looks like the Fed will accelerate tapering its bond-buying program and raise rates in 2022.

The market worries that higher rates will cause more BNPL borrowers to default and that higher rates could potentially also dampen consumer demand, especially if the economy continues to grapple with supply chain and labor issues or future lockdowns. In September, Reuters reported that a third of US consumers who signed a BNPL agreement had missed one or more payments.

A bank like Citizens, with more than $ 123 billion in loans, is much less focused on BNPL. Additionally, credit quality appears to have held up pretty well on Citizens’ BNPL book at the end of the third quarter, with unrecorded loans where borrowers missed payments and write-offs where debt is unlikely to be recovered below that 2020 level.

The other great thing about Citizens is that it acts as a bank as a hedge against inflation as it is wealth sensitive. That means more of the returns on its assets (like loans) will be valued higher than its liabilities (like deposits) when the Fed hikes rates. And Citizens is pretty wealth sensitive. A 1% incremental increase in the federal funds rate would result in 5% more net interest income over the next year that banks earn on loans and securities after they cover their borrowing costs and are a major revenue driver.

A less risky BNPL game

Ultimately, Citizens is in a different class than a company like Affirm. It won’t offer nearly the same upside potential, but it will be better against the downside. As long as inflation doesn’t get too high, a stock like Citizens benefits from higher interest rates.

I also think that BNPL could be an interesting customer acquisition strategy for citizens if it can use BNPL to reach customers on a national level and then sell other banking products such as a mortgage or student loan to those customers. Citizens is still viewed more as a traditional bank by investors, but the bank is growing its BNPL portfolio, which stands out as a compelling digital retail strategy to differentiate itself from its peers.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.


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