Shares of Citizens' Financial rise 2% on first morning of trading

Shares in Citizens Financial moved higher in early trading on Wednesday, after the regional bank's initial public offer (IPO) by parent RBS had hitherto received a lukewarm reception.

Under their new ticker symbol "CFG", the shares hit $22.25 in choppy early trading before retreating to around $22 by 11:00 EST.

The IPO saw RBS float 140m Citizens shares for $21.50 each, giving the Rhode Island-headquartered business a $12bn market capitalisation.

This was below its hoped-for range of between $23 and $25 a share.

"Hardly fatal, but perhaps market expectations had (once again) got over-extended?" wondered Investec analyst Ian Gordon

Although the US banking sector's profits are back at their highest level since the crisis, Citizens' capital levels and governance had been criticised by the Federal Reserve in its yearly stress tests earlier in the year.

Investors were also doubtful whether management's stated profitability targets could actually be met and balked at the original price offered.

Targets targets included a near-doubling of the group’s return on equity, a key measure of profitability, in just three years.

"This does appear very ambitious, given the difficult backdrop," conceded analyst Garry White at Charles Stanley. "Also, when the owner of an asset, in this case RBS, is a forced seller, investors are also likely to pressure for the shares to be sold relatively cheap."

RBS has initially sold 25% of Citizens, raising $3bn, but a greenshoe option with underwriters Morgan Stanley and Goldman Sachs for 15% more shares could see RBS raise a total of $3.5bn for selling a 28.75% stake.

For RBS, while the reduction in the IPO pricing was another sign that investors are getting more cautious, analysts believe the flotation is good news for shareholders, boosting RBS's capital buffers and allow management to focus on the core UK market.

"The reduced sale proceeds may take some of the froth out of the RBS 'bull' case, but perhaps the bigger picture is that an anticipated capital uplift of 2-2.5 percent should still follow upon deconsolidation," added Investec's Gordon.

Gordon said that the IPO price was equivalent to 0.9 times RBS's net assets, which implies a small, $0.3bn loss on sale, although this will not be recognised in the next results but only once the bank sells down to below 50%, which is expected to be in the first half 2015.

Once RBS sells 50% analysts say its core capital adequacy ratio should be boosted by 2-3 percentage points.