Citigroup Still Has A Lot to Prove

Image Source: Citigroup Quarterly Presentation 

By Matthew Warren

On July 15, Citigroup (C) reported Q2’19 revenues up 2% year over year to $18.8 billion and adjusted earnings (excluding a gain on its investment in Tradeweb) of $1.83, or 3 cents better than consensus estimates. Expenses in the quarter were down 2%, yielding the 11th consecutive quarter of positive operating leverage and improving efficiency ratios, which currently stands at 56% in the quarter. This has helped boost return on tangible common equity (RoTCE) to 11.9% in the quarter and the first half of the year, quite close to management’s commitment of 12% for the full year.

Management has also stated a goal of reaching 13.5% for the same metric for the following year in 2020. If these ratios—reflecting above cost of capital returns on tangible capital–were to hold going forward, then the company would be worth more than tangible book value per share of $67.64. To this point, sell side analysts remain skeptical of next year’s return targets. I would argue that we are enjoying a very benign economic backdrop and that it is hard to argue that current results reflect mid-cycle averages. With that being said, management deserves credit for delivering solid improvements the past three years.

In the Global Consumer Banking (GCB) segment, revenues were up 4% in the quarter, expenses were up only 1%, and net income was up 11%. This was despite some normalization in credit costs, up 6% year over year. Management cited portfolio growth and seasoning in the North American cards business. Card purchase sales were up 7% reflecting good usage growth by the underlying customer base. North American Consumer Banking net income was flat, while International Consumer Banking net income was up 25% on the back of solid expense control and benign credit costs in Latin America and Asia.

In the Institutional Clients Group (ICG) segment, total revenues were flat and net income was up only 3%, as weakness in investment banking, corporate lending, fixed income and equity markets offset better results in other subsegments. Solid expense control offset higher credit costs. Growth in average deposits of 9% showed some underlying strength aside from the weakness in more market reliant revenues.

Net interest margins came under some pressure with more expected as we appear to be entering a rate cutting cycle of unknown magnitude and duration. Citigroup has been an improving-efficiency-ratio and return-on-capital story over the past 3 years (with positive economic conditions as a tailwind), but it still maintains a large portion of the bank that is reliant on market levels and market activity. It also remains a subscale bank in North America compared to its larger peers. Citigroup still has a lot to prove to the markets judging by the skepticism baked into the stock price, which might be well warranted if it turns out we are late in this economic cycle. Kudos to management for continuing to pull various levers under its control to improve the bank’s fundamentals.

Related: XLF

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