ii view: Citigroup aided by investment banking

Earnings again beat expectations under the relatively new CEO Jane Fraser. We assess prospects. 

Third-quarter results to 30 September

• Revenue down 1% to $17.15 billion
• Adjusted revenue up 3%
• Net income 48% to $4.64 billion
• Earnings per share up 58% to $2.15

Chief executive Jane Fraser said:

“The recovery from the pandemic continues to drive corporate and consumer confidence and is creating very active client engagement.

“We are moving forward with urgency on our top priorities in order to responsibly narrow the returns gap with our peers: the Transformation, refreshing our strategy and building a culture of excellence.

“Overall, I am quite pleased with $4.6 billion in net income given the environment we are operating in. While we have much work ahead, we are getting results from the investments we have been making and seeing both the strength and durability of our franchise,"

ii round-up:

US banking giant Citigroup (NYSE:C) today reported a strong jump in third-quarter earnings, given an ongoing economic recovery from the pandemic and buoyant merger and acquisition (M&A) activity. 

Profit for the quarter to the end of September rose 48% to $4.6 billion as investment banking and equity market related revenues both gained by 40%. Earnings per share of $2.15 exceeded analyst estimates of nearer to $1.70, with overall group sales up 3% when excluding its previous Australian consumer business sale. 

Citigroup shares rose marginally in early US trading, having about doubled from pandemic induced market lows back in March 2020. Shares for German rival Deutsche Bank (XETRA:DBK) are up by a similar amount since March 2020. Citi, like Deutsche, is now undergoing a restructuring programme.

The company, which operates both a global consumer banking and institutional clients business, previously outlined plans to exit 13 global consumer banking markets, largely across Asia. Under relatively new CEO Jane Fraser, it will concentrate on the four hubs of Singapore, Hong Kong, the UAE and London. 

Revenues for its global consumer banking unit, including the sale of its Australian business, fell 13% to $6.2 billion, although net income gained 45% to $1.34 billion. Sales for the institutional business including its investment banking operations rose 4% to $10.79 billion. Divisional profit gained 21% to $3.42 billion.

Citi returned $4 billion to shareholders over the quarter, almost mirroring the $4.1 billion paid in the second quarter. Like rival JPMorgan (NYSE:JPM) 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, rising costs and increased uncertainty over prospects for the US and global economies cannot be ignored.  It is possible that stretched US government finances and an ongoing political war over borrowing ceilings and levels could eventually result in tax increases. Moves to restructure the bank can also generate one-off costs. 

But a refocused strategy under the relatively new CEO offers hope. A forecast dividend yield of close to 3% (not guaranteed) is also not derisory in an ultra-low interest rate era. In all, and while some caution remains sensible, a current analyst estimated fair value share price of $84 offers ongoing 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