Yesterday in Goldman Sachs Financial Services conference Citi CFO spoke. In the 3Q Citi did mention they will do modest buyback but I was thinking probably they will do $200 or $300 m buyback, and in the call he mentioned Citi has done $500 m buyback. Separately, the moderator offered an opportunity to reset the expectation that Citi set during the investor day (i.e, 11% to 12% RoTCE return on the capital employed). Last quarter it was around 6~7%, CFO talked about 3~4% revenue growth and expenses coming down a bit. The stock after declining to $38, rallied 25% since Oct-27th.
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Lot of things have changed and here are my current thoughts:
Pros’
The stock is still cheap
The CEO is aggressively repositioning the banks (divesting certain countries, investing in some parts of the business and a big restructuring (layoff)
Currently having decent CET1 ratio
Challenges
The ROTCE is very low compared to peers, they are not earning enough on the assets and equity
Citi’s deposit base is not as strong as JPM, BAC & WFC
Basel III endgame regulatory requirements are still unknown and a risk
Citi has a huge credit card business, in a recession there will be significant write-off (full cycle $10 B my estimate)
The restructuring is going to cost $1 B, which may impact capital levels and buyback.
Citi needs to bring their expenses below 60%, while continuing to invest in the systems, people and business. Some of this is done in 2023, but you will see this in 2024, and well into 2025 (i.e., elevated spending)
My original expectation of Citi can aggressively buyback and that will boost EPS is out of the window. The stock is cheap, so cheap many negatives and some potential execution issues are already priced in. This is not a buy and hold but trading stock. For ex: if you bought it below $40 at October you could be sitting with 25% gain. Will trade when opportunity presents but keep 5% position because the dividend is 4.5%.
This is last quarter credit card performance metrics.
Citi operates two segments in credit cards, Branded Cards and Retail services. Retail services is a co-branded cards with retail businesses (like Macy’s, tractor supply, etc). If you see the quarterly spend on that is $23.3 B but the balance carried on those cards are $50 B and NII is 17.8%, that is this business generates $9 B in interest income Yearly. Currently NCL’s are 4.53% but I fully expect this to increase significantly. So between now, and recession and getting out, we should expect significant losses. Is that going to be as high as $10 B, probably. If it comes less than this number, that falls to the bottom line.
Yesterday there was a news item that Citi is closing its Muni market desk. Citi once dominated this market, that it is exiting completely. Sad. And then today they are telling their employees to work from home for the last 2 weeks and they are saying this to close to 240K employees. I can only imagine the morale of the employees, going through this uncertainty during holidays.
Always choose wisely whom you marry, find a way to adjust/ give in to your spouse, both working, and living below your means is one way of dealing with the uncertainties life throws at you.
Lot of love for citi today, price target updates. I sold some today, which I might regret. Earnings on 1/12 and we will know the extent of cut and probably their pathway for bending the curve on expense. May be this year!!!
From WSJ…
Wells Fargo banking analyst Mike Mayo is starting 2024 with a bold call: Citigroup’s stock will more than double over the next three years.
Mayo is known for asking Citi tough questions. He’s grilled executives over their weak returns, high expenses, pay, and even their ATM cleanliness. It’s a long list.
Today, he says Citi is his top banking pick and in the midst of a turnaround. He put a $70 one-year target on the stock and said his base case is for $119 in 2026. Citi ended 2023 at $51.44.
This isn’t exactly the mood of the market, where Citi is trading at half its book value and still near 2009 prices. (Mayo’s range of possibilities is wide: He puts a $165 bull case estimate on the stock and a $22 bear case.)
“Investors repeatedly tell us – ‘Don’t talk to me about Citigroup!’” Mayo writes. “To us, this negative sentiment creates a more favorable setup for a potential double in the stock over 3 years. … We disagree with the many investors who say that Citi is unmanageable, unquantifiable, and/or un-investable.”
My view:
Mayo was not always bearish on Citi. He actually has a soft corner for Citi. He is ex Citi-employee. When management didn’t meet their goals, or when the goals looked unrealistic he questioned but Citi CEO/CFO always took his questions and answered, never dismissed the way they dismissed some analysts, because you can sense Mayo really wants Citi to succeed. Why I am stating this is, it is bold and a big call, double in 3 years, that is 26% CAGR. It is not going to be a simple straight line.
Separately, Merill Lync/ Bank of America has selected Citi as one of their top ideas for the first quarter! Only Morgan Stanley is bearish on this name.
Here is a piece about Mayo… ‘The market’s wrong, I’m not’: Analyst Mike Mayo still a provocateur
Looks like 4Q is going to be a kitchen sink quarter. Today Citi issued an 8-k after the close, earning on Friday, so they are front running the earnings, because the news might have leaked or it is so bad, they don’t want the stock to nosedive on earnings. My guess is probably both.
Anyways, here are the highlights
- $1.3 B charge for Russia & Argentina
- $1.7 B FDIC special assessment (expected)
- $880 M translation loss in revenue Argentina (due to peso devaluation)
- $780 M charges for severance
and more importantly they released the numbers for the new reporting segments, i.e., citi talked about how they are are going to organize under 5 segments and will provide the details in 4-Q. Now, they have released the numbers from 2021 on the new reporting segments.
So they are front-running some of the news before the earnings call and also kitchen sinking ( at least that is my first impression). Net-net they are going to declare loss this quarter, again expected, but the extend may be higher than the expectation.
Lot to digest. I thought my $47.5 covered call will get assigned, now I am worried.
Here is an article from WSJ on Citi Muni desk and the impact of its closing
There are many drivers, but one of the important driver is this unit is not making enough profit. It is not losing money, but not making enough profit, that is the profit they generate to the capital employed is not sufficient. The Basel III increases the weightage of RAW (risk weighted assets) and how much capital is required to support such businesses. The regulations are getting rougher meaning businesses cannot take risk and regulators are trying to ensure no banking institution will fail. Is that a reasonable expectation? Okay some “too big to fail” we can understand. But not letting businesses fail? This leads to restrictive policy, which in-turn leads to reduced profitability, which in-turn leads to Citi existing the business.
We are getting into vicious cycle that starts eliminating competition and making “too big to fail” even bigger.
The restructuring at least the initial phase seems to be coming to an end this week. We will get some color on that in 1Q and probably 2Q will mark the first clean quarter with most of the moving parts out and reporting on the new segments clear. Of course the stock price is steadily raising to $61. The targets are going up.
Good Q1 numbers. Citi stated that they will do modest buybacks and looks like they did $500M. TBV at $86.67. Still there is no bending the curve on expense, and ROTCE is still below their projections. Otherwise Citi is mostly delivering on their other priorities. The stock price can scale only if they can reduce the expense and increase the ROTCE.
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Today Citi announced couple of executives leaving the company. Titi Cole, who managed Citi’s exit of consumer banking in dozens of countries and managed the Citi restructuring (job cuts) is leaving the company. While the organizational restructuring is mostly done, i.e., aligning the divisions to the new structure, but Citi’s goal of 20K job cuts is not completed. Some of the job cuts are tied to Mexico unit IPO and some will happen as the company changes its technology. But there are still lot of stranded costs, i.e, roles that are no longer required due to restructuring or business exits. While we don’t know what is the true reason, but corporations are typically empire building and having a huge number of folks under you is important for many leaders. So she may be hitting walls and may have decided to leave. I have no idea whether that is the case, but wondering about it, because it will directly impact Citi’s ability to reduce the expenses and increase profitability.
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The individual line items strength in inflation numbers are masking weakness in labor, consumer, etc. Other data is bringing them out.
My expectation is Citi’s next 3 quarters may be bad relative y-o-y, but Q1 they outperformed. If there is any weakness I will use that as buying opportunity. Barring a massive charges for the cards, Citi will start buyback after 2Q, post stress test.
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JPM’s yesterday Investor presentation they are talking about 17% ROTCE!!! They will be earning $50 B on NII… let it sink…
I know always JPM is strong, but stupid not to buy it on valuation.
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A fat finger error… Matt Levine of Bloomberg described in details… In a nutshell, a trader entered $$ value in units column for a basket of 349 stocks, which is primarily entered for hedge. Lot of things failed:
- The data feed provider failed
- Exchanges were closed for holiday
- The poor design of the UI
- The poor design of the UI (that is it generated 711 alerts and only 18 were read by people, why? because it generates alert for every da#n order!)
- The poor controls, allowed $196 B worth of orders to go, and stopped the reminder of the original $444 B order.
- The risk control failed, they ignored initial alerts, subsequently they emailed and waiting for response!!
- The risk control team went on vacation, about 8 minutes before the fat-finger order entered, you can’t make these things up
Eventually, the trader saw the stock price drop and canceled the order, by then Citi has lost $50 M but the wider market dropped by 4%
These kind of failures are pretty common (while rare at individual firm) in corporate world.
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Not sure how the elections in Mexico changes this.
There are 3 near-term catalysts:
- Andy Sieg, Head of Wealth at Citi, will present at the 2024 Morgan Stanley U.S. on June 12; We will get an update on how they are doing in this LOB and any updates to the guidance
- Services investor day onJun 18; This is the first Line of Business presentation; Citi has an opportunity to convince skeptical investors
- Stress test results Jun 26th; Last time Citi ended up requiring higher buffer, a negative surprise; If Citi manages not to pull any negative surprises, then we will get a better idea on how much buyback Citi can do, for the reminder of the year; Any buyback I expect to be accelerated to take advantage of lower valuation (i.e, price to TBV discount)
June could be a busy month for Citi.
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Heard nothing new. Today they announced additional hire, primarily bringing Keith, his guy from BAC. There are additional layoffs taken place in this LOB it seems. They are projecting the expenses to come down in Wealth in 2Q. Clearly they are not growing as much as they are expecting so, cutting down expenses. While wealth should be 30% pre-tax and 20% net, it is far from there.
ON Friday, the new of Citi’s living will test failure came out. CIti has so far had not put out any press report. Hopefully this doesn’t adversely affect them in their ability to do buyback. Citi may end up reducing some of its risky assets (meaning earnings hit, higher risk, higher profits) and spending more on systems to produce more reports. When you have Trillion dollar assets, and a very huge derivatives there is no such thing as orderly shutdown. The regulators can model all they want, there are always going to be surprises and unknown. These massive banks essentially have implicit guarantee from Fed that they will never be allowed to fail.
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It is well received. Most sell side research notes talked about the value of the services business. The value ranges from $30 per share by Morgan Stanley’s Betsy, she is very bearish on Citi to $100 by Mike Mayo who is currently very bullish on Citi (separately Mike only has $80 price target 
). However, the price target didn’t move up.
Separately, on 24th WSJ had an article titled " The Clock Is Ticking on Jane Fraser’s Citigroup Turnaround". This is not only about Citi’s turnaround but more importantly it is also about the CEO. Clearly, there are folks who are going after her, presumably for her job.
The last two lines from the article captures very well
If turning Citi around weren’t so hard, it would have happened by now.
“There are easier places to work,” Fraser said
I never expected this to be straight line, so far they have delivered on things they said they will do… However, none of that matters if Citi cannot increase its profitability, i.e., ROTCE to at least above 9% and buy some more time to get to their stated goals.
- There are regulators worried about this mammoth bank (“They are never, ever, getting out of those consent orders,” one former Citi executive said); This also partially reflected in FDIC pushing the bank resolution plan, while this puts pressure on the bank and hopefully it doesn’t impact otherwise.
- There are competitors who want some pieces of Citi, and they encourage the chatter on breaking the bank.
- Some of the recent hires are all hoping someday they will be CEO and they want that day to be tomorrow.
Jane has a lot on her plate. Wishing her well and my portfolio…
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