Citigroup Inc. (C, Financial) has demonstrated its ability to adapt and overcome challenges. Amid ongoing economic uncertainties, the bank reported positive second-quarter results last week.
The bank's strategic turnaround plan has also yielded encouraging results, with top-line growth in key areas driven by multinational and commercial clients. However, Citigroup remains mindful of investment banking and wealth management challenges.
Earnings update
Citigroup's second-quarter earnings highlight the bank's resilience amid global macroeconomic challenges. The global economy remains robust, with the U.S. labor market supporting the economy, the eurozone exceeding expectations and China's growth slowing down.
The New York-based bank reported net income of $2.9 billion (down 36% year over year) and earnings of $1.33 per share (down 39%), with revenue flat compared to the previous year at $19.4 billion.
Further, the company is on track to meet its revenue guidance of $78 billion to $79 billion and is pursuing cost-saving opportunities to offset transformation investments.
Source: Investor Presentation
Notably, the company recoded positive performance in its Transaction Services and Security Services segment as revenue increased 15%. Markets experienced a 13% decline in revenue, while investment banking sales were down 24%, prompting it to focus on selected areas like technology and health care. In addition, the U.S. card businesses saw double-digit revenue growth, while retail services experienced faster credit normalization due to a cautious consumer environment. The wealth segment's revenue declined 5% due to a shift in deposit mix and lower investment revenue, though Asia's activity picked up.
Citigroup's asset quality remains strong with over $20 billion in total reserves, representing approximately 2.7% of funded loans. The bank's exposure to commercial real estate lending is significant, with 90% being investment grade. Consumer credit metrics remain stable, with net credit losses below pre-Covid levels. The balance sheet is also well diversified at $2.4 trillion, funded by a $1.3 trillion deposit base and liquidity resources of nearly $1 trillion. The Common Equity Tier 1 capital ratio is 13.3%, exceeding regulatory requirements.
Further, the Institutional Clients Group experienced a 9% revenue decline, mainly due to lower sales in markets and investment banking. However, Transaction and Trade Solutions showed strong growth. The Personal Banking and Wealth Management business saw a 6% revenue increase, with net interest income growth offsetting lower non-interest revenue. With increased net interest income guidance, Citigroup maintains its revenue guidance of $78 billion to $79 billion for the full year.
Finally, the bank expects net credit losses in the card business to normalize and maintains its expense guidance of approximately $54 billion.
Strategic progress on turnaround plan
Citigroup has made significant strides in its strategic turnaround plan, focusing on five interconnected businesses and achieving positive results during the first phase. The company's core businesses, particularly TTS and security services, have experienced notable top-line growth, driven by deeper penetration of multinational clients and momentum with commercial and middle-market clients. Despite investment banking and wealth management challenges, the company's diversified business model has helped offset overall performance impacts.
Source: ID22 Presentation
Additionally, the bank acknowledged the importance of addressing the evolving regulatory environment and preparing for potential stress tests, increased oversight and changes in capital requirements. Citigroup emphasizes expense management and strengthening balance sheets to capture growth opportunities when economic conditions stabilize. Economic uncertainties have affected corporate clients' sentiments, while consumer clients have shown resilience despite the uncertainty.
In the second quarter, Citigroup faced headwinds in its markets and investment banking businesses compared to the previous year. Fixed income performed better than equities in the markets division, and the bank maintains its full-year revenue guidance while optimizing net interest income sensitivity. The company actively manages its asset-liability positions to benefit from rising rates while reducing asset sensitivity in anticipation of potential rate decreases. The bank's sensitivity analysis indicates a possible $1.8 billion reduction in NII with a 100 basis point decrease in rates, skewed toward non-U.S. dollar exposures.
Moreover, the bank has successfully executed its strategic turnaround plan, achieving top-line growth, meeting expense targets and building capital aligned with medium-term objectives. Key areas of success include the TTS business and security services, which demonstrated strong top-line growth. Despite the challenges, Citigroup remains committed to bending the expense curve, improving operating leverage, reducing stranded costs and capitalizing on investments.
As a result, the bank has achieved its CET1 target of 13% and remains disciplined in capital allocation, resuming buybacks while considering quarterly adjustments. Additionally, the medium-term ROTE target of 11% to 12% depends on revenue momentum, expense control, credit normalization, exits and regulatory changes. Citigroup's strategic priorities involve divesting non-core consumer businesses in Asia, releasing significant capital, with progress made in Indonesia and Taiwan, and winding down operations in China, Russia and Korea. The bank also intends to pursue an initial public offering for Banamex in Mexico, aiming to preserve revenue and positively impact financials.
Further, Citigroup is focused on bending the cost curve by reducing expenses through exits, transformation investments and organizational simplification. These initiatives are already yielding results and are expected to generate long-term shareholder benefits while enhancing efficiency and regulatory compliance. TTS has shown remarkable growth and a 50% win rate in client acquisitions, benefiting from global trends like supply chain diversification. The investment banking and trading segments face some challenges, but have potential in green and sustainable finance.
Finally, Citigroup is well capitalized, aiming to return capital to shareholders while meeting medium-term return targets and driving share price growth. The bank has an ROTCE target of 11% to 12% within three to five years, focusing on executing its strategy transparently to rebuild credibility and create value for shareholders amid macro and regulatory uncertainties.
Technical analysis
Technically, Citigroup’s share price (weekly timeframe) has been in the accumulation phase for over a year. Positive second-quarter earnings and major progress on the turnaround plan may serve as key factors for a breakout and the initiation of a markup phase in the stock price.
Similarly, the relative strength index suggested a bullish divergence during 2022. Since then, the price has constantly taken support around $42.50. Now that the price is compressing within the consolidation, forming a symmetrical triangle, large moves can be expected in the coming weeks. Further, the strength of the breakout may be accelerated by the interaction with the 200-day exponential moving average (black line). Overall, the current price is still near the support level, and taking long positions may result in an early entry in markup over the 200-day EMA.
Source: tradingview.com
Takeaway
In conclusion, Citigroup's second-quarter earnings showcase resilience with positive performance in core businesses. The strategic turnaround plan has yielded notable top-line growth from multinational and commercial clients. Despite headwinds in markets and investment banking, Citigroup remains oriented toward achieving its CET1 target, divesting non-core consumer businesses in Asia and pursuing an IPO for Banamex in Mexico.
The stock's accumulation phase and bullish divergence followed by price concentration suggest a potential breakout and markup, bolstering investor confidence. With a focus on efficiency and shareholder value, Citigroup is poised for future growth.
