Undervalued Regional Banks: Why Citizens Financial Group's Upgrade Signals a Sector Re-Rating

The recent BofA Securities upgrade of Citizens Financial Group (CFG) to Buy from Neutral, coupled with a raised price target of $65.00 (a 25% upside from its current price), marks a pivotal moment for the regional banking sector. This move, driven by a compelling valuation and growth catalysts, underscores a broader narrative: regional banks are increasingly being recognized as undervalued assets in a shifting economic landscape.

A Catalyst-Driven Upgrade for Citizens Financial Group

BofA Securities' analysis highlights three core drivers behind CFG's re-rating potential. First, the firm projects a significant improvement in CFG's return on tangible common equity (ROTCE), which is expected to rise from 10.2% in 2024 to 14.6% by 2028, according to a regional banks analysis. This trajectory, if achieved, would position CFG among the top performers in the regional banking space, where ROTCE averages hover around 10–12%, according to The Financial Brand. Second, strategic investments in digital transformation and commercial banking-evidenced by the appointment of Ted Swimmer as Head of Commercial Banking-have unlocked new revenue streams, particularly in small business lending and wealth management, as noted in BofA's analysis. Third, the redemption of Series F preferred stock has bolstered capital efficiency, reducing regulatory complexity and enhancing shareholder returns, another point highlighted in BofA's note.

BofA's valuation model further reinforces the upgrade. By applying a 12.5x 2026 P/E ratio and a 1.6x price-to-tangible book value (up from prior assumptions of 10x and 1.3x), the firm accounts for CFG's improved capital structure and earnings visibility. This aligns with broader industry trends: regional banks are trading at a discount to their intrinsic value, with a median P/E of 12.27 in Q3 2025 compared to a forward ROTCE-driven P/E of 15–18, according to CSIMarket P/E data.

Broader Industry Tailwinds: Why Regional Banks Are Poised for Re-Rating

CFG's upgrade is not an isolated event. The regional banking sector is experiencing a confluence of macroeconomic and structural catalysts that could drive a sector-wide re-rating:

1. Margin Expansion and Rate Normalization:
   The re-steepening of the yield curve in 2025 has provided regional banks with a critical tailwind. As the traditional "borrow short, lend long" model regains relevance, net interest margins (NIMs) are expected to expand by 20–30 basis points over the next 18 months, according to the Substack analysis. For CFG, this could translate to a NIM of 3.4% by 2026, up from 3.1% in Q2 2025 as the same analysis projects.

2. Capital Return Initiatives:
   Share buybacks and dividend hikes are becoming central to regional banks' value propositions. KeyCorp, for instance, announced a $1 billion buyback program in H2 2025, reflecting confidence in its 9.8% CET1 capital ratio (as described in the Substack piece). CFG's 3.23% dividend yield already outperforms the S&P 500's 0.8% average, making it a magnet for income-focused investors-a point emphasized in BofA's note.

3. M&A Activity and Strategic Flexibility:
   The sector is witnessing a surge in merger speculation, with regional banks actively pursuing acquisitions to consolidate market share and optimize capital. CFG's $15 billion asset base places it in a sweet spot for strategic buyers, while its digital infrastructure and commercial banking expertise make it a valuable target, according to the Substack analysis.

4. Regulatory and Economic Tailwinds:
   A more favorable regulatory environment, coupled with low credit losses (non-current loans remain below 1.5% of total loans, per The Financial Brand), has reduced risk premiums for regional banks. Meanwhile, the U.S. economy's bifurcation-where AI-driven sectors thrive while housing and low-income consumers struggle-has created asymmetric opportunities for regional banks to focus on high-growth niches, as also noted in BofA's commentary.

Risks and Mitigants

While the case for regional banks is compelling, risks persist. Commercial real estate (CRE) exposure remains a concern, with banks holding $10–100 billion in assets facing the highest CRE loan concentrations (199% of risk-based capital as of Q2 2024, a point raised in BofA's analysis). However, current charge-off rates remain historically low, and proactive loan repricing is mitigating margin pressures, as The Financial Brand reports. Additionally, the Federal Reserve's anticipated rate cuts in 2025 could temporarily dampen NIMs, though the sector's diversified revenue streams (e.g., CFG's 20% fee income contribution highlighted by BofA) provide a buffer.

Conclusion: A Strategic Buy for Long-Term Investors

BofA Securities' upgrade of CFG is a microcosm of a larger trend: regional banks are being re-evaluated as engines of growth rather than relics of the 2023–2024 banking crisis. With a combination of margin expansion, capital discipline, and strategic flexibility, CFG and its peers are positioned to outperform in a low-growth, high-inflation environment. For investors, the key is to focus on banks with strong ROTCE trajectories, diversified revenue models, and manageable CRE exposure-factors that CFG exemplifies.

As the sector navigates macroeconomic uncertainties, the undervalued regional bank story is far from over.