Citibank current thoughts
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Business simplification by exiting various countries are mostly done. Mexico IPO is the last major action item pending. Few divisions have new heads (external hires).
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Regulatory, consent orders - on-going
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Modernize infrastructure - This is ongoing. Citi is catching up with the IT investments (12 to 14 B) that include run and transformation ($6 B). This also involves retiring many legacy applications, platforms;
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Data Enhancements - IT transformation, reducing the # of applications, platforms, automation are required. The second quarter Civil penalties are associated with this. Citi has significant challenges here.
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Buybacks, going forward only quarterly guidance, 3Q guide is $1 B; expect this to ramp up to $8 B or $2 B per quarter in 2025; Tangible Book Value - $87.53
5.1. There were no buybacks in 2Q
5.2. Waiting for Basel III end-game and Mexican IPO -
Ongoing yearly Expenses will be $51 ~ $53 B; The expenses are not expected to go down, instead the savings will be applied on technology and other investments;
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RoTCE guidance - 11% to 12%: Current - 7.2%; My expectation is Citi can achieve 9% ~ 10% RoTCE
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Revenue - The goal is 4% to 5% CAGR; I expect Citi may be able to achieve 2% to 3%, but doubt they can get to 4% to 5%, also revenue is somewhat dictated by economy
8.1. NIM will go down as the rates go down; This will be somewhat mitigated by fee income growth
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CET1 Ratio - 13.6%; 12.3% is regulatory requirement; it will further decrease to 12.1% in Oct 2024; Significantly releasing lot of capital for buyback;
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Dividends - $2.12 ($0.53) to $2.24 ($0.56) - Yield @$65 - 3.45%
Citi has reorganized itself into 5 divisions.
Services: This is the crown jewel of Citi. Services include Treasury and Trade Solutions (TTS) and Securities Services. TTS provides an integrated suite of tailored cash management, trade and working capital solutions to companies. Securities Services provides cross-border support for clients, providing on-the-ground local market expertise, post-trade technologies, customized data solutions and a wide range of securities services solutions that can be tailored to meet clients’ needs.
Operates in 195 countries.
Growth: Low to Mid single digits
Allocated Equity: $25 B
RoTCE Current: 24%
RoTCE Medium-term Guidance: 25%
Markets: This division provides corporate, institutional and public sector clients around the world with a full range of sales and trading services across equities, foreign exchange, rates, spread products and commodities. Citi has strong positions in fixed income and equity trading. Recently they exited the Muni market.
Operates (trades) in 80 countries and proprietary network in 95 countries and jurisdiction
Growth: Low to Mid single digits
Allocated Equity: $54 B
RoTCE Current: 10.7%
RoTCE Medium-term Guidance: 10 ~ 13%
Banking: This division includes Investment Banking, advisory services related to mergers and acquisitions; and Corporate Lending, which includes corporate and commercial banking, serving as the conduit of Citi’s full product suite to clients.
Growth: High teens
Allocated Equity: $ 22 B
RoTCE Current: 7.5%; ytd - 8.6%
RoTCE Medium-term Guidance: 15%
US Personal Banking: This includes credit card (Branded Cards and Retail cards), Retail Banking, Citibank NA (North America), which provides traditional banking services to retail and small business customers.
Cards delinquencies are normalizing, they were unusually low during the pandemic period and it is catching up. Long-term model is around 4% to 6% delinquency rate. Currently the NCL’s ($2.3 Billion) are hurting the returns, it is almost 50% of the revenue; Conservatively reserved, profit recovery in this business is key to achieve higher firm wide RoTCE targets; Vis Raghavan is hired as the new head, he is hired from JPM.
Growth: Mid to high single digits
Allocated Equity: $ 25 B
RoTCE Current: 1.9%
RoTCE Medium-term Guidance: 13 ~ 17%
Wealth includes Private Bank provides financial services to rich clients through banking, lending, mortgages, investment, custody and trust product offerings. Operates in 20 countries. Citi customers have $5 T assets in other institutions and growth will be achieved by gaining higher % with existing customers. Long-term this is expected to be 30% pre-tax and 20% RoTCE
Growth: High single digits to low double digits
Allocated Equity: $ 13 B
RoTCE Current: 6.4%
RoTCE Medium-term Guidance: 13 ~ 15%
Thoughts on valuation
RoTCE using 10% cost of equity method - $150 B - Current market cap $125
Book value multiple: 1.1 TBV; expect at least to recover to 80% to 85% of TBV, which is $70~$75;
EPS multiple: Should get back to 10 to 11 PE - $66
The smart pundit on Berkshire board used to diss BAC for earning low on asset and equity and preferred Bank of Santander, especially out of financial crisis… here is the results…
