ii view: Citigroup profits beat forecasts despite revenue drop

A discounted valuation, a new CEO and a dividend yield of around 3%. Buy, sell or hold?

Second-quarter results to 30 June

• Revenue down 12% to $17.5 billion
• Net income 486% to $6.19 billion
• Earnings per share up 650% to $2.85

Chief executive Jane Fraser said:

“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.”

ii round-up:

US banking giant Citigroup (NYSE:C) today reported a mixed second-quarter trading performance under its still relatively new chief executive Jane Fraser. 

Earnings per share jumped significantly to $2.85 from last year’s Covid-hit $0.38, as Citi again returned cash from previously set aside bad debt pandemic provisions. That beat analyst expectations for nearer to $2 per share.

But overall group revenues came in 12% lower at $17.5 billion, led by a 14% fall in sales at its institutional client division. 

Citi shares fell marginally in early US trading, having gained by more than a third over the last year. Shares for German rival Deutsche Bank (XETRA:DBK) are up by around a fifth over that time. Citi, like Deutsche, is now undergoing a restructuring programme. 

Citi, which also operates a global consumer banking business, previously outlined plans to exit 13 markets, largely across Asia for global banking, with the four hubs of Singapore, Hong Kong, the UAE and London to be its new focus.

Like rival JPMorgan Chase (NYSE:JPM), Citi’s bond trading, or fixed income business battled tough comparatives from last year. Revenues fell 43% to $3.2 billion given the lack of a tailwind coming this time around from central bank pandemic measures. But revenues for its equity market business rose by 37% to $1.1 billion. Changes of personnel under the new CEO have been made. 

A 12% fall in revenues at its Citi-Branded Cards business to $2 billion given lower average loans provided the core direction at its global consumer banking division.

Citi returned $4.1 billion to shareholders over the quarter. Like rival JP Morgan it has also resumed its share buyback programme. 

ii view:

Citi operates through the two divisions of global consumer banking and institutional clients. Global banking is the largest credit card issuer by loans outstanding. The institutional clients division serves the complex needs of companies, financial institutions, public sector bodies and investment managers. It facilitates $4 trillion of transactional flows daily. 

For investors, both Covid and economic outlook uncertainty need to be remembered. A global consumer banking business not yet firing on all cylinders is also noteworthy, as is the dampening impact on profits from continued ultra-low interests and the banks previous operational challenges.

That said, a refocused strategy from the new chief executive offers hope. An estimated price-to-net asset value ratio of under one compared to over 1.5 times at rival JP Morgan, suggests potential value, while a forecast dividend yield of around 3% (not guaranteed) is also not insignificant in an ultra-low interest rate era. In all, and despite some room for caution, a current analyst estimated fair value share price of almost $84 implies scope for long-term upside. 

Positives: 

• Geographical diversity
• Attractive dividend payment (not guaranteed)

Negatives:

• Falling revenues 
• Lower interest rates are broadly bad for bank profitability

The average rating of stock market analysts:

Buy