Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18 Earnings Update
Prev. Ed.: News Update, Mar 2, 2018
Brokers’ Recommendations: Positive: 66.7% (12 firms); Neutral: 27.5% (5); Negative: 5.5% (1) Prev. Ed.: 11; 6; 1
Brokers’ Target Price: $85.43 (↓$0.49 from last edition; 14 firms) Brokers’ Avg. Expected Return: 22%
Note: We do not have access to the report from broker having the Sell recommendation on the stock.
Note: A flash update on 1Q18 Earnings was done on Apr 13, 2018.
Portfolio Manager Executive Summary
Citigroup Inc. is a global financial services company, which provides a range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage, as well as wealth management to consumers, corporations, governments, and institutions.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward the optimistic side, with 66.7% of the firms in the Digest group being positive while 27.8% being neutral. The remaining 5.5% of the firms rendered negative ratings. The target price ranges from a low of $74.00 to a high of $101.00 and the average price came in at $85.43, implying a positive return of 22%.
Chief Investment Considerations:
§ Strong worldwide network
§ Improving credit quality
§ Success in expense savings initiatives
§ Rising interest rates
§ Run-down of legacy problem assets
§ Ability to return capital to its shareholders
§ Limited organic growth opportunities
§ Regulatory and legal issues
Positive or equivalent (12 firms or 66.7%): These firms maintain a positive stance on Citigroup due to the relatively attractive valuation of the stock. The stock has upside prospective from a recovery in the global economy, given its worldwide network and improvements in the consumer credit quality in the U.S. Some firms believe that Citigroup is well positioned to make a substantial development in its strategic initiatives and has the potential to return meaningful capital to shareholders. The firms believe that the bank’s diverse footprint would help offset the headwinds from financial regulations in the U.S. and tepid loan growth. Its risk reward profile continues to improve, with an improvement in the overall balance sheet, transition towards a customer driven model, run down of its legacy problem asset portfolio Citi Holdings, along with its moderating impact on the overall earnings, the expected wind down of its legacy mortgage portfolio as well as improving asset quality and greater capital flexibility. With its focus on efficient management of expenses and better growth prospects due to a rising interest rate environment, the firms believe that the company remains well poised to generate positive operating leverage along with probable reserve releases in the days ahead, and this will be an important factor for the stock. Despite near-term headwinds in the form of global market risks, the firms value this stock over the long term, given its sound core operations and strong capital position.
Neutral or equivalent (5 firms or 27.8%): These firms believe that Citigroup’s earnings power is recuperating, following an improvement in credit quality, strong potential for capital return and its diverse international business. Some firms expect Citigroup to gain from its footprint in many improving developing economies in the near term. Citigroup’s long-term strategy to shrink non-core assets and increase its fee-based business mix will also improve the valuation over time. However, the shrinking of Citi Holdings’ portfolio cuts into its earnings power, thereby partially restricting the upside potential of the stock. Moreover, the uncertain global macroeconomic environment and regulatory issues remain overhangs. While revenue growth from its global franchisee is encouraging, the associated higher level of volatility cannot be ignored.
April 20, 2018
Overview
Citigroup Inc. (C) is a globally diversified financial service holding company providing a range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management to consumers, corporations, governments and institutions. Citigroup has around 200 million customer accounts in over 160 countries and jurisdictions.
Citigroup currently operates via three business segments effective first-quarter 2017.
Global Consumer Banking (GCB) business includes retail banking, Citi-branded cards and Citi retail services in North America, Asia, Latin America, Europe, the Middle East, and Africa.
Institutional Clients Group (ICG) consists of Banking and Markets and Securities services.
Corporate/Other comprise global staff functions and other corporate expenses, unallocated global operations, as well as technology, Corporate Treasury and discontinued operations.
As announced in October 2014, Citigroup intends to exit its consumer businesses in 11 markets – Costa Rica, El Salvador, Guatemala, Nicaragua, Panama and Peru, Japan, Guam, and its consumer finance business in Korea and the Czech Republic, Egypt and Hungary. Furthermore, the company plans to exit certain businesses in ICG. Effective January 2015, these businesses were being reported as part of Citi Holdings. However, the restructuring has been mostly complete and results of Citi Holdings will no longer be reported separately. It has been included into Corp/Other, beginning first-quarter 2017.
More information about the company is available on www.citigroup.com.
Analysts identified the following key factors for evaluating the investment merits of Citigroup:
Key Positive Arguments / Key Negative ArgumentsFundamentals
§ A global distribution network gives Citigroup an edge over its domestically focused peers.
§ A significant presence in the emerging markets enables it to offer client access and insight into the highest growth areas of the world.
§ The company is consistent in its efforts to reduce legacy positions.
§ Following governmental aid and several restructuring initiatives, Citigroup has achieved a solid capital base. It also has a sizable amount of loan loss reserve.
Growth Opportunities
§ Organic growth initiatives are likely to spur future growth. Global Consumer Banking and Institutional Clients Group, its core business, remains very attractive and its unique franchise allows clients to access high growth foreign markets. Moving ahead, the company looks forward to capitalizing on the enormous strength of this franchise, once the ongoing de-leveraging of Citi Holdings is accomplished.
§ The rising rate environment is likely to lend support to the bank’s revenues. / Fundamentals
§ Credit metrics, though improving, are at high levels and are projected to remain so considering the protracted economic recovery.
§ The shrinking of Citi Holdings’ portfolio, cuts into its earnings power, partially restricting the upside potential of the stock.
§ Investors are concerned about management’s ability to execute growth initiatives due to its past inabilities to increase earnings successfully.
Regulatory Environment
§ There is a concern over the impact of the financial reform regulations on the company’s operations.
Note: Citigroup’s fiscal year coincides with the calendar year.
April 20, 2018
Long-Term Growth
The firms remain optimistic about Citigroup’s long-term growth. They consider the company to be a well-diversified financial services organization, which has been strategically divesting its slower growth and low-return businesses over the past quarters.
According to the firms, Citigroup’s diverse business model is encouraging, with nearly half of its revenues being generated from emerging markets. With expectations of a much faster GDP growth in the emerging markets than the developed ones, the company remains well poised for future growth.
The firms believe that the company is attempting to change its business model through a balanced approach to growth through both organic means and acquisitions as against its prior acquisition-led strategy, connecting its various businesses, leveraging products and improving its distribution network, creating a common database for the entire company, expanding in international markets as well as improving operating efficiency.
The firms pointed out that the above-average growth from non-US exposure is a differentiating factor for Citigroup in the long term. Despite operating headwinds in the near term amid concerns for the sluggish global economy growth, the firms see good long-term value in Citigroup shares, given the outlook for improving credit quality and growth in book value and excess capital. The company has achieved its target of 10.0% Basel III Tier 1 common ratio in 2Q13, well ahead of its target of 2013-end. Further, management accomplished the target of achieving an efficiency ratio of 58% range in 2016.
The company proposes to exit the consumer banking business in 11 markets. The global footprint will now cover 24 markets that represent more than 95% of GCB’s current revenues. The 11 markets include Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary and Japan. Notably, Citigroup has exited certain markets and is in the process of exiting others. The move comes in line with the company’s strategy to focus on markets where it has strong presence and long-term growth prospects. Further, streamlining of operations would aid Citigroup to accomplish its goals of efficiency improvement within the stipulated time.
Apart from trimming its consumer business, Citigroup also intends to exit from a number of non-core businesses in ICG. These include hedge fund services within securities services, and prepaid cards business in treasury and trade solutions. The move is aimed at further lowering the expense base and improving profitability. Such businesses will be included in Citi Holdings. Also, in line with its move of shedding branches, the company remains focused on concentrating its branches around New York, Boston, Washington DC, Miami, Chicago, LA and San Francisco. Additionally, Citi continues to invest in technology systems to enhance its digital capabilities. Furthermore, during the second half of 2016, Citi announced more than $1 billion investment in Citibanamex, likely to close by 2020.
Strengthening its card business, Citigroup acquired U.S. co-brand credit card portfolio of Costco Wholesale Corporation from American Express Company in June 2016. The company acquired over $10.5 billion of credit card receivables.
The firms believe that the tailwinds related to Citigroup's global position, improving capital ratios and attractive valuation, balances the risks associated with the divestiture of Citi Holdings' assets and exposure to the eurozone. Therefore, the firms believe that the shares represent an attractive opportunity for long-term investors even though shares are unstable in the near term. In addition, the firms hold that the company has significant potential to return excess capital to shareholders over the long term.
April 20, 2018
Target Price/Valuation
Provided below is the summary of valuation and ratings as per Zacks Research Digest:
Rating DistributionPositive / 66.7%↑
Neutral / 27.8%↓
Negative / 5.5%
Avg. Target Price / $85.43↓
Maximum Upside from Current Price / 44.3%
Minimum Upside from Current Price / 5.7%
Upside from Current Price / 22%
Digest High / $101.00
Digest Low / $74.00↑
No. of Analysts with target price/Total / 14↑/18
Risks to the target price include the performance of capital markets, a competitive operating environment, flattening yield curve, declining credit quality, mortgage putbacks, regulatory risks and adverse litigation developments, geopolitical and international economic risks as well as the potential for a valuation allowance on its large deferred tax asset.
Recent Events
On Apr 13, 2018, Citigroup announced 1Q18 earnings results. Driven by top-line strength, the company delivered a positive earnings surprise of 4.3%. Earnings per share of $1.68 for the quarter handily outpaced the Zacks Consensus Estimate of $1.61. Also, earnings compared favorably with the year-ago figure of $1.35 per share.
Net income came in at $4.6 billion, up 12.2% year over year.
Overall, high revenues were reported, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. However, fixed income markets revenues disappointed. Moreover, expenses escalated on ongoing investments.
Citigroup’s costs of credit for 1Q18 were up 12% year over year to $1.9 billion. This rise largely reflects net credit losses of $1.9 billion and a net loan loss reserve release of $36 million.
Revenues
In 1Q18, Citigroup’s revenues amounted to $18.9 billion, up 3% year over year (y/y). The rise was driven by a 7% increase in Global Consumer Banking (GCB) and 6% upsurge in Institutional Clients Group (ICG), partially offset by a 51% plunge in Corporate/Other.
Quarterly Segment Revenues:
GCB: GCB revenues were $8.4 billion, up 7% y/y. Growth across all regions and the impact of the Hilton portfolio sale in North America Citi-Branded Cards drove the upswing. In constant dollars, revenues increased 6%, including sale of the Hilton portfolio.
ICG: ICG revenues were up 6% y/y to $9.8 billion. Notably, revenues from total banking climbed 6%, and total markets and securities services revenues increased 3% on a year-over-year basis. Notably, fixed income markets revenues decreased 7% y/y.
Corporate/Other
Corporate/Other revenues of $591 million tanked 51% y/y, driven by legacy assets run-off.
Outlook
On a full-year basis, management expects core accrual net interest revenue to be up more than $2.7 billion in 2018, including the March rate-hike impact. Legacy asset-related net interest revenues are expected to further decline by $500 million in 2018 due to winding down of the portfolio. Further, trading-related net interest revenues will likely to continue to face headwinds in a rising rate environment.
Citigroup expects NCL rate in the range of 300 basis points (bps) for 2018 and up to 325 bps, over the medium term. In retail services, NCL rate is projected at 500 bps for 2018, and up to 525 bps, over the medium term.
For 2018, management projects top-line growth at around 3%, with stronger growth in operating businesses being offset by the continued wind down of legacy assets.
Acceleration in growth for overall Latin America Consumer revenues is expected in 2018 on rising card revenues.
The level of $200-$250 million of pre-tax loss per quarter is estimated for Corporate/Other through 2018.
In consumer, management expects continued revenue growth in U.S. retail banking, retail services, Mexico and Asia. In U.S.-branded cards, excluding Hilton, continued underlying revenue growth is anticipated as loan balances are maturing as anticipated. However, this would be mostly offset by the impact of additional partnership terms that went into effect in January. Moreover, the Hilton portfolio sale will likely have a year-over-year impact.