ii view: new Citigroup CEO off to a promising start

Global consumer banking is to become more focused. We review prospects.

First-quarter results to 31 March 2021

• Revenue down 7% to $19.3 billion
• Net income up 216% to $7.9 billion
• Earnings per share up 214% to $3.62

Chief executive Jane Fraser said:

“It’s been a better than expected start to the year, and we are optimistic about the macro environment. We are committed to serving our clients through the recovery and positioning the bank for a period of sustained growth. 

“Our capital levels remained strong and stable, allowing us to respond to the needs of our clients and return capital to our shareholders. At 11.7%, our Common Equity Tier One Ratio was
unchanged from the fourth quarter and we resumed the repurchase of common stock, which we had voluntarily paused at the onset of the pandemic.”

ii round-up:

New Citigroup (NYSE:C) chief executive Jane Fraser wasted no time in implementing strategic changes at the major US and international bank.

Retail banking operations across 13 markets, largely in Asia, are to be exited given the bank’s current lack of competitive scale, with the four hubs of Singapore, Hong Kong, the UAE and London proving its new focus.

Like rival JPMorgan (NYSE:JPM), buoyant financial markets activity and the return of reserves previously set aside to cover expected pandemic related loan losses helped the bank to beat Wall Street profit forecasts. 

Citi shares rose by more than 2% in pre-market US trading, leaving their gain over the last year at around 70%. Shares for rival JPMorgan are up by a similar amount, while shares for UK bank Barclays (LSE:BARC) have more than doubled. 

Citi's earnings per share came in at $3.62 per share, comfortably ahead of analyst estimates at under $3 per share. A reserve return of nearly $3.9 billion helped fuel the earnings beat, as did a 46% in investment banking related revenues to a total of nearly $2 billion. 

Equity market related sales rose 26% year-over-year to $1.47 billion. Net income for its institutional client division surged by 64% to $5.94 billion compared to the first quarter of last year. 

Less favourably, revenues for its global consumer banking division fell by 14% to $7 billion. Lower card volumes and reduced interest rates across all regions, given central bank action to limit pandemic damage, more than countered strong deposit growth and gains in wealth management.

Citi returned $2.7 billion to shareholders over the quarter. Like rival JP Morgan, it has also resumed its share buyback programme. 

ii view:

Citi operates through 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, a still Covid clouded outlook cannot be ignored. A global consumer banking business yet to fire on all cylinders is also noteworthy, as is the dampening impact on profits from continued ultra-low interests and the banks previous operational challenges.

But clear intention to refocus strategy from the new CEO offers reassurance, as do further returns of prior bad-debt provisions in relation to the virus crisis. A forecast dividend yield of close to 3% (not guaranteed) is also not insignificant given current low interest rates. In all, while Citi still has much to do to elevate its status to that of JP Morgan, the new CEO is off to a good start. 

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