ii view: investment bankers damage Citigroup profits

Shares in this major US bank fell by a quarter in 2022 and remain on the backfoot this year. We assess prospects. 

Second-quarter results to 30 June

• Revenue down 1% to $19.4 billion
• Net income down 36% to $2.9 billion
• Adjusted earnings per share down 39% to $1.33 
• Capital cushion or CET 1 ratio of 13.3%, down from the prior quarter’s 13.4%

Chief executive Jane Fraser said:

“Amid a challenging macroeconomic backdrop, we continued to see the benefits of our diversified business model and strong balance sheet.”

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

ii round-up:

US banking giant Citigroup Inc (NYSE:C) reported falling revenues and earnings, impacted by higher costs and reduced demand for its investment banking services.

Revenues fell 1% year-over-year to $19.4 billion, with costs rising 9% and including redundancy expenses, helping drive adjusted earnings down 39% to $1.33 per share.

The bank's share price fell 4% in post market trading having come into this latest announcement down by a similar amount over the last year. That’s similar to rival Bank of America Corp (NYSE:BAC) and in contrast to a near 17% rise for the S&P 500 index itself.

Citi operates through the two divisions of Institutional clients and Personal Banking and Wealth Management (PBWM). Revenues for Institutional clients fell 9% year-over-year to $10.4 billion, including a 24% decline in investment banking related sales to $612 million. Combined equity and fixed income related market revenues dropped 13% to $4.62 billion, hindered by client caution during the political row over the US government’s debt borrowing limit. 

More favourably, PBWM sales climbed 6% to $6.4 billion, helped by an 8% increase in revenues for Citi's branded payment cards to $2.3 billion, given higher interest payments following hiked US central bank interest rates made to quell elevated inflation. 

Under head Jane Fraser, Citi has been selling overseas businesses where it believes it cannot compete effectively. Revenues for its now Legacy franchises fell 1% to $1.9 billion, with overall losses rising to $125 million from the prior year’s $17 million. 

Citi previously declared a dividend of $0.51 per share, unchanged from the previous quarter. It returned a total of $2 billion in both dividends and share buybacks during the quarter.

ii view:

Tracing its history back more than 200 years, 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. In 2022, its Institutional Clients division generated almost 55% of revenues, with PBWM accounting for almost a third and Legacy businesses the balance of around a tenth.  

For investors, the tough economic backdrop and earlier year fallout from regional players such as Silicon Valley Bank should not be forgotten. Reduced geographical diversity following its retreat from consumer markets overseas warrants consideration, costs generally for businesses are elevated, while tech sector job layoffs from giants such as Meta Platforms Inc Class A (NASDAQ:META) and Amazon (NASDAQ:AMZN) could set a trend, forcing unemployment higher and increasing bad debt provisions.  

• A buying opportunity for fans of high yielding recovery stocks
• US earnings season calendar Q2 2023
• ii view: JP Morgan profits fly as it beds down First Republic bank

On the upside, higher interest rates have pushed interest income for its significant cards business higher, and diversity persists across the operations despite a more focused strategy under CEO Jane Fraser. The capital cushion of 13.3% is 1% above its new required regulatory level, while a forecast dividend yield of over 4% is attractive. 

Citigroup has been one of the weaker US banks over the past five years, and investors appear to believe more interesting prospects exist elsewhere. However, with the shares trading significantly lower than its tangible book value, some may see Citi as a value play. 

Positives: 

• Business transformation
• Attractive dividend payment (not guaranteed)

Negatives:

• Uncertain economic outlook
• Reduced geographical diversity

The average rating of stock market analysts:

Strong hold