Pros Top Bank Earnings Winner

Banks kicked off earnings season with a twist.

Normally, JP Morgan (JPM) is the big winner.

Yet, Citigroup (C) turned out to be the big winner, with shares popping off earnings that trounced expectations:

• Earnings: $1.86 per share, adjusted, vs. $1.23 expected
• Revenue: $21.10 billion vs. $20.4 billion expected

The bank has been pushing hard to transform itself into a simpler structure and become the preeminent banking partner for institutions with cross-border needs, a global leader in wealth management, and a valued personal bank in its home market.

And if the search activity by financial pros are any indication, they see this working.

Citigroup isn’t like most traditional banks.

Which makes it an unique and valuable addition to most portfolios.

Here’s why.

Citigroup’s Business

A global leader in banking, Citigroup has spent the last several years exiting its international business in markets like Asia, focusing instead on a narrower structure.

This led to five business units:

• Services (19% of total revenues) – This segment includes Treasury Trade Solutions and Securities Services.
• Markets (21% of total revenues) – Comprises Fixed Income and Equity Markets.
• Banking (25% of total revenues) – Covers Investment Banking and Corporate Lending.
• Wealth (18% of total revenues) – Encompasses Private Bank, Wealth at Work, and Citigold.
• U.S. Personal Banking (17% of total revenues) – Includes Branded Cards, Retail Services, and Retail Banking.

Source: Citigroup Q1 Investor Deck

While most regional banks are tied more closely to traditional loans and net interest margins, Citigroup’s focus on institutional clients and broader services makes them a bit less sensitive to interest rates than overall economic activity.

So, it’s not much of a surprise they beat consensus as the U.S. economy keeps humming along.

Financials

Source: Stock Analysis

With higher rates, Citigroup’s net interest income has climbed from $42.5 billion in 2021 to $55.1 billion in the last twelve months.

However, streamlining reduced non-interest income from $29.3 billion to $23.1 billion during that same period.

Non-interest expenses also climbed from $47.5 billion to $57.4 billion.

However, FY24 expense guidance is set to $53.5-$53.8 billion excluding the FDIC special assessment.

Restructuring changes are expected to yield $2.0-$2.5 billion in savings in the medium term.

Overall, this puts Citigroup in a healthy position to keep improving its profitability 

Valuation

Source: Seeking Alpha

Citigroup’s valuation shows it trading at a healthy discount to its peers based on a price-to-book ratio of just 0.59x. Anything below 1.0x implies underperformance on its assets.

This ties to the bank’s increase in non-conforming credit card loans, which jumped 17% QoQ and 74% YoY which it attributed to a pullback in government stimulus.

We see this as a temporary impact and one that’s not unique to Citigroup.

Growth

Source: Seeking Alpha

Citi’s revenue growth also isn’t expected to be phenomenal as it continues to focus on internal performance rather than external growth.

Nor does it have the additional deposit base like JP Morgan.

That’s why it’s forward looking revenues are closer to Bank of America (BAC) and Wells Fargo (WFC).

Profitability

Source: Seeking Alpha

Citi’s biggest problem is its declining net income margin, which has resulted from its ongoing transformation.

We expect that to improve as Q1 has already increased to 16.0% and Q4, in which Citigroup saw a net loss, driven by many one-time items.

Our Opinion 9/10

Citigroup’s pathway to improved profitability is well underway.

We believe the market is underpricing its future performance, weighing it down by businesses that it has already exited.

Although it may take time to fully realize its value, the stock is trading at a historical discount that we see as an opportunity.