ii view: Citigroup flags revenue beat as it executes restructuring plan

Third-quarter results to 30 September

• Revenue up 9% to $20.1 billion
• Net income up 2% to $3.5 billion
• Adjusted earnings per share up 1% to $1.52 
• Capital cushion or CET 1 ratio of 13.5%, up from the prior quarter’s 13.3%

Chief executive Jane Fraser said:

“Last month we announced consequential changes that align our organisational structure with our strategy and changes how we run the bank. When completed, we will have a simpler firm that can operate faster, better serve our clients and unlock value for our shareholders.”

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ii round-up:

US banking giant Citigroup Inc (NYSE:C) has detailed revenue and earnings which marginally beat Wall Street expectations, as it enjoyed decade high demand for its Treasury and Trade Solutions business given heightened interest rates and increased net interest income. 

Overall group revenue rose 9% year-over-year to $20.1 billion, with Treasury and Trade Solutions revenue up 12% to $3.6 billion. That helped nudge up earnings before business disposals by 1% to $1.52 per share. 

Shares in the S&P 500 bank, which have swung between marginal losses and gains in post results trading, came into this latest announcement down by close to a tenth year-to-date. That’s similar to European rival Deutsche Bank AG (XETRA:DBK), although is in contrast to a one-tenth gain for North America’s biggest bank by stock market value JPMorgan Chase & Co (NYSE:JPM). The S&P 500 index itself is up around 13% year-to-date. 

Citi currently operates through the two divisions of Institutional Clients and Personal Banking and Wealth Management (PBWM) and has been selling overseas businesses where it believes it cannot compete effectively.

Institutional Client revenue rose 12% year-over-year to $10.6 billion, with PBWM sales climbing 10% to $6.7 billion. Institutional Client profit growth of 13% to $2.5 billion comfortably outpaced 1% growth at PBWM to $803 million. Revenue at its Legacy franchises fell 13% to $2.2 billion, with profit falling 60% to $127 million. 

In September, Citi announced plans to reduce management layers and reorganise the bank into the five divisions of US personal banking, wealth management, investment and commercial banking, trading, and institutional services. Management flagged revenue growth for all five of these newly designated divisions during this latest period. 

The bank previously declared a dividend of $0.53 per share, up from the prior quarter’s $0.51 per share, with $1.5 billion returned to shareholders via dividends and share buybacks during the quarter. 

Fourth-quarter results are scheduled for 12 January. 

ii view:

Tracing its history back more than 200 years, Citigroup is today focused on being a banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in its home US marketplace. In 2022, its Institutional Clients division generated almost 55% of revenues, with PBWM accounting for almost a third and Legacy businesses the balance of around a tenth.  

For investors, the challenging economic backdrop, with fears that further interest rate hikes could push global economies into recession should not be forgotten. Remember, it was higher rates that triggered problems among regional players like Silicon Valley Bank earlier this year. Operating expenses rose 6% during the latest three-month period, while geographical diversity has been reduced following overseas disposals at its consumer-focused banking business. 

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On the upside, higher interest rates have pushed interest income higher, including at its institutional related Treasury and Trade Solutions business. Diversity across its operations persists, despite a more focused strategy under CEO Jane Fraser. The capital cushion of 13.5% is $14 billion above its current regulatory minimum level, while a forecast dividend yield of around 5% is not to be forgotten. 

An ongoing management focus on increasing efficiency is sensible, while the consensus analyst estimate of fair value at over $50 per share implies expectation of upside for the shares. However, the difficult economic backdrop is unhelpful and Citi has been the worst performing major US bank stock over the past six months. Watch for signs that the trend is turning.

Positives: 

• Business transformation
• Attractive dividend payment (not guaranteed)

Negatives:

• Uncertain economic outlook
• Reduced geographical diversity

The average rating of stock market analysts:

Strong hold