Image Source: Matt Buck
By Matthew Warren
Cititgroup’s (C) third-quarter report, released October 15, showed revenue of $18.57 billion, which beat consensus by $30 million and non-GAAP EPS of $1.97 which beat by $0.02. GAAP EPS of $2.07 beat by $0.12. Revenue in the quarter was up only 1%, as currency headwinds lowered overall reported growth rates. The efficiency ratio worsened slightly to 56.3% from 56.1% in last year’s quarter. On this key metric, the bank lags its money center peers. Similarly, it lags peers with respect to return on tangible common equity (ROTCE), too, which came in at 12.2% in the quarter, though this metric has improved markedly under the current management team.
Earnings before taxes were down 1%, but a lower tax rate meant net income was up 6%. Ten percent fewer shares outstanding thanks to buybacks meant that earnings per share were up a whopping 20%, highlighting what outstanding excess capital return that share buybacks at around tangible book value can do for the shareholders.
End-of-period loans grew 4% in the quarter versus last year and end-of-period deposits grew an impressive 9%. The bank is having success converting US branded credit card holders, getting them to open savings and transactional accounts, with two thirds of those openings taking place away from its 6 core US geographic (footprint) markets. This shows the power of its credit card relationships and rewards programs, and it also shows the disruptive nature of digital banking. Citigroup plans to roll out similar programs to gather transactional and deposit banking accounts with its co-branded credit card accounts soon.
Citigroup remains well capitalized with a 11.6% Common Equity Tier 1 Capital Ratio, but there isn’t room to lever up. Management has recently expressed less optimism about reaching its previously stated goal of reaching a 13.5% ROTCE in 2020, and the market consensus has them coming up short of the same goal. Operating leverage has helped the bank improve this metric by several percentage points in the past few years, but it appears that the cost-cutting road is getting increasingly difficult. Now more revenue dependent in improving its return metric, this leaves the bank also counting on the 11-year economic upcycle to continue. It is therefore unsurprising that this bank trades right near its tangible book value of $69.03 per share. Our fair value estimate remains $71 per share.
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Matthew Warren does not own shares in any of the securities mentioned above. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.