ii view: Citigroup beats estimates but shares fail to keep gains

First-quarter results to 31 March

• Adjusted revenue up 3% to $21.1 billion
• Profit down 27% to $3.4 billion
• Earnings per share (EPS) down 27% to $1.58 per share
• Adjusted EPS down 15% to $1.86 per share
• Capital cushion or CET 1 ratio of 13.5%, up from 13.4%

Chief executive Jane Fraser said:

“Last month marked the end to the organizational simplification we announced in September. The result is a cleaner, simpler management structure that fully aligns to and facilitates our strategy. It will also help us execute our Transformation, progress as we retire multiple legacy platforms, streamline end-to-end processes, and strengthen our risk and control environment. This is necessary to both meet the expectations of our regulators and also to serve our clients more effectively.”

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

ii round-up:

US financial giant Citigroup Inc (NYSE:C) continued to underline its ongoing transformation programme as both revenues and earnings beat Wall Street forecasts. 

Increased debt and equity issuance helped investment banking related sales rise by just over a third year-over-year to $903 million, fuelling first-quarter adjusted earnings of $1.86 per share compared with analyst estimates of $1.23.

Citigroup shares initially rose in post results trading but ended the session down 1.7% given the read-across from JPMorgan Chase & Co (NYSE:JPM) results. There was also a negative response to Citi's cautious outlook comments in relation to expected interest income as debate continues over whether base rates will be cut later this year.

Total Citigroup revenue fell 2% year-over-year to $21.1 billion as the bank’s ongoing transformation and simplification programme, including business disposals and that of its Indian consumer business, impacted. Revenue excluding disposals rose 2% from a year ago.

Overall Citigroup profit fell 27% year-over-year to $3.4 billion, hindered by restructuring related costs and an increased contribution towards the government’s Federal Deposit Insurance scheme.  

Revenue gains at its Services division which helps institutional clients and Investment and Personal Banking both helped counter revenue declines at both Markets and Wealth Management divisions.  

Shareholder returns of $1.5 billion during the period included a quarterly dividend of $0.53 per share, unchanged from the prior fourth quarter. 

Broker Morgan Stanley highlighted its ‘overweight’ stance post the results. Second-quarter results are scheduled for 12 July.  

ii view:

Citigroup is today focused on being a banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in its home US marketplace. The bank’s transformation programme has included a move from two giant divisions to five core businesses to increase transparency and give greater focus on areas of growth, as well as reducing management layers and group costs.  

For investors, expected US interest rate cuts in 2024 will likely lower net interest income, and industry competition for deposits remains intense, which also compresses margins. Previous overseas business disposals have reduced geographical diversification and, despite a focus on costs, overall group expenses during this latest quarter were up 7% from a year ago, although down 11% from the previous quarter. 

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• The Week Ahead: Rio Tinto, easyJet, Liontrust, Rentokil
• Gold’s hitting new highs – why it’s rising and how to invest in it

On the upside, a transformation programme at the bank continues and diversity across its operations persists despite a more focused strategy. Increases in other fees could help counter an expected fall in net interest income, a capital cushion (CET1 ratio) of 13.5% is robust, while shareholder returns remain a focus with the shares offering a forecast dividend yield of around 3.6%. 

For now, and while some caution looks sensible, management’s push to increase efficiency and a consensus analyst fair value estimate above $66 per share offer grounds for cautious optimism. 

Positives: 

• Business transformation
• Attractive dividend payment (not guaranteed)

Negatives:

• Uncertain economic outlook
• Reduced geographical diversity

The average rating of stock market analysts:

Buy