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.
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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