ii view: Citi beats estimates and stays optimistic

Shares in this major US bank have underperformed the S&P 500 index year-to-date. We assess prospects. 

Third-quarter results to 30 September

• Revenue up 6% to $18.51 billion
• Net income down 25% to $3.5 billion
• Earnings per share down 24% to $1.63

Chief executive Jane Fraser said:

“We have made good progress on many of the core business drivers we laid out at Investor Day, despite the complex macro environment.

“We continue to shrink our operations in and exposure to Russia and we will be ending nearly all of the institutional banking services we offer next quarter. To be clear, our intention is to wind down our presence in this country.

“Given the strength of our balance sheet, capital levels and liquidity, we are well positioned to help our clients navigate very challenging markets and slower growth,”

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ii round-up:

US banking giant Citigroup Inc (NYSE:C) detailed third-quarter results ahead of Wall Street hopes, aided by both increased interest income following recent Federal Reserve rate hikes and profit from the sale of its Asian consumer business. 

Revenues rose 6% year-over-year to $18.51 billion, ahead of analyst estimates for nearer to $18.25 billion, while earnings per share fell 25% to $1.63, hindered by increased bad debt provisions and lower investment banking fees, although aided by a $520 million profit for the sale of its Asia business. Excluding the business disposal, earnings of $1.50 surpassed forecasts closer to $1.40 per share. 

Citigroup shares rose by just under 1% in US trading post the results announcement, having come into this latest update down close to 30% year-to-date. Shares for US rival JPMorgan Chase & Co (NYSE:JPM) are down by a similar amount in 2022, while the broad S&P 500 index has fallen by around a quarter year-to-date. 

Citi operates through the two divisions of Personal Banking and Wealth Management (PBWM) and Institutional clients. PBWM revenues rose 6% year-over-year to $6.2 billion, pushed higher by increased interest income following rate hikes, and stronger loan growth for businesses including its branded cards business. 

Revenues for its Institutional client’s division fell 5% from the year ago quarter to $9.47 billion, hit by a near two-thirds drop in investment banking fees and a one quarter fall in activity for its equity related unit. More favourably, Treasury and trade solutions revenues grew by two-fifths to $3.2 billion as foreign exchange markets came to life given interest rate differences between such regions as the US and Europe in the wake of Central Bank moves. 

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Under current CEO Jane Fraser, Citi has been selling overseas businesses where it believes it cannot compete effectively. Revenues for now legacy franchises including businesses in Asia and Mexico totalled $2.6 billion during the quarter. Citi is to end nearly all the institutional banking services it provides in Russia by the end of the first quarter of 2023 given the war in Ukraine. 

Like JP Morgan, Citi also previously halted its share buyback programme given the uncertain economic outlook and a previous central bank stress test. It did still return $1 billion in dividends during the quarter. 

ii view:

Formerly known as Global Consumer Banking, Citi’s personal banking and wealth management business now looks to reflect its streamlined, strategic focus on US Personal Banking. It is one of the world’s largest credit card issuers by loans outstanding. Its Institutional Clients division serves the complex needs of companies, financial institutions, public sector bodies and investment managers via 95 offices worldwide. It facilitates $4 trillion of transactional flows daily.

For investors, a highly uncertain economic outlook, including elevated inflation and a cost-of-living crisis, cannot be overlooked. Heightened geopolitical tensions including those between the US and China continue to warrant consideration, as does reduced geographical diversity given its retreat from consumer markets in Asia and the volatile and cyclical nature of services such as investment banking. 

On the upside, a more focused strategy is now being pursued. Interest rate rises can be beneficial for banks, allowing for wider margins between deposits and lending, while the prospective dividend yield is over 4.5%. 

For now, and while some caution looks sensible given economic uncertainty, consensus points to long-term value here.  

Positives: 

• Business transformation
• Attractive dividend payment (not guaranteed)

Negatives:

• Uncertain economic outlook
• Halted share buybacks

The average rating of stock market analysts:

Strong hold