Citi: A covered call strategy

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Citi came out better on the stress test results. The only major bank which saw the SCB (stress capital buffer) decrease!!! This means Citi can do $5 to $8 B in buybacks!! Yayyyy. The reason behind the SCB reduction is higher NII, which is good.

The 3 near-term catalysts played out, wealth presentation showed how much work is ahead in that LOB, and services presentation helps investor understand the real value driver behind Citi and stress test is mildly positive.

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The stress test predicts huge loss in credit card ($29.1 Billion), i.e., 17% of cards or outstanding loans will be loss under adverse conditions tested by the Fed. This is not entirely unexpected. My expectation was Citi will incur $10 B additional loss, i.e., over and above the regular provisions, in a recession cycle. The below reinforces that and probably I have to increase that number to $15 B.

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Citi announced quarterly dividend increase from $0.53 to $0.56 per share and will assess share repurchases on a quarter-to-quarter basis.

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Citi will do $1 B in repurchase this quarter (3Q).

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Yesterday Citi CFO presented in Baclays Global Financial services conference. Pretty much re-iterated the guidance.

  • We’re looking at Investment Banking fees to be up somewhere around 20% year-over-year
  • Markets … when I look at the quarter this year, we’re looking at performance that’s generally consistent with consensus, so down roughly 4% year-over-year
  • Cost of Credit, we’re estimating for the quarter and there’s still some quarter left, about $2.7 billion or so of Cost of Credit… the real driver of the balance is really the ACLs, and that’s really driven by our new volumes (Kingran: Credit card charge will be slightly higher vs guidance $2.3 to $2.4 B, but it is driven by higher volume, not because cards are performing badly, i.e., the default % will remain same for branded and retail cards; Additional commentary about covid cohort charge off etc, in other words, there are lot of noise but fundamentally the business is doing okay)
  • our (revenue) guidance for the full year is $80 billion to $81 billion. I still feel good about our ability to deliver on that - inline
  • guidance on expenses is still the $53.5 billion to $53.8 billion likely on the higher end (Kingran: Additional commentary on medium term guidance of $51 to $53 B, as I have posted in the past, expenses are not going to come down, in spite of all the savings from layoff’s $1.5 B and getting out of various business ($500 M), rather they will be spend on transformation and regulatory compliance, modernization etc)
  • we’re running at a 13.6% CET1 capital ratio, that’s well above the 12.1% regulatory requirement (Citi has significant capital buffer, yet they are not accelerating the buybacks, they are very cautious);So far now, assume they will do only $4~$5B annual buyback or about 3% vs ability to do 6% to 7%.
  • we feel very good about the target that we said 11% to 12%
  • Some good color on revenue growth for various segments.

At the end of the day they need to execute.

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The earnings call of this Qtr was a big mess… Mike Mayo started the Q&A with the first Qst that had 2 parts and the below is the second part. Citi exec’s especially CEO failed to convincingly answer the question on “asset-cap”

Mike Mayo: I guess I’d highlight as you know, on October 2 Senator Warren asked the OCC to impose growth restrictions because Citi is “too big to manage.” I would assume you don’t agree with that, but still the question that a lot of people have is what assurances can you give that an asset cap won’t happen at Citigroup?

The shares started tanking, the management didn’t address it until…

VIVEK JUNEJA: Okay. Thanks on that. And shifting to the asset cap question, Jane and Mark, we didn’t hear a clear answer on, A, do you have an asset cap? And B, even if you don’t, what is the effective implication or impact of what the regulators have said?

Analysts before Vivek were touching but Citi is not picking it up and answering it. Vivek had to explicitly ask that question… You really don’t have to spell it to senior execs… yet…

JANE FRASER: So let me be crystal clear. We do not have an asset cap and there are no additional measures other than what was announced in July in place and not expecting any.

I understand the execs have to be careful not to reveal their conversation with the regulatory authorities. But, when a question is asked so directly, you cannot move on without answering it.

Separately, this highlighted to me, the risks that are inherent in banking and one you cannot anticipate. This is where position sizing matters.

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The original thesis provided 13.35% CAGR and holding the stock straight would have produced 20% CAGR. I was bit concerned about Citi’s ability to pull the turnaround and certain other risks.

This is one of my strong conviction name, that I didn’t bet heavily. Sad, but that’s the story of my investing life.

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Citi from the time of the post to date has purchased little over 90 million shares only. In spite of lower share price during 2023, 2024, and even in 1Q, the company didn’t aggressively buyback. Rather they focused on restructuring the business. The share price growth is entirely because of the improvements on the business and not because of the buyback.

While you may have arrived at the destination, the path you expect to travel vs the ones you took are different.