NEW YORK - Citigroup is the least highly prized of the big U.S. banks. There are a few reasons why, from its history of behavioral missteps to a lack of growth. Changing minds takes time, but after Monday’s decent second-quarter earnings, Citi’s slow turnaround is becoming more credible.
Citi’s valuation has been stuck in a hole for years. The $166 billion lender’s market value has traded below its book value since at least 2013, a shorthand way of saying investors think Chief Executive Mike Corbat isn’t creating value. And while the shares are up almost 50% in that time, the bank has almost always languished below the average valuation of its big peers, JPMorgan, Wells Fargo, Morgan Stanley , Goldman Sachs and Bank of America.
The main reason to buy the stock, then, has been hope and buybacks, and mostly the latter. Citi has repurchased roughly one-quarter of its shares since Corbat took over in 2012; last month the bank pledged to spend $17.1 billion to take stock off investors’ hands over the next 12 months.
Promises of performance have been less effective. Citi wants a return on tangible common equity of 13.5% by 2020, but analysts predict closer to 12%, according to Refinitiv estimates – a tad higher than the second quarter’s annualized return, excluding a one-off gain. Corbat wants costs down to 53% of revenue by then; consensus forecasts are closer to 56%.
More growth would help. Citi’s North American credit-card business makes up around a fifth of the whole group’s revenue, but grows less quickly than rival JPMorgan’s, and its accompanying retail bank is roughly one-quarter the size. Scale would bring down costs. Where Citi’s North American consumer bank has an efficiency ratio of around 53%, the credit-card business within it is closer to 40%, which implies the traditional banking outfit is roughly half as productive.
Things are changing, slowly. Citi’s consumer-banking’s top line from the region increased 3% last quarter, faster than a year earlier, thanks to a 7% jump in its own-brand credit-card revenue. Retail-banking deposits increased by an annual 2%, though customer numbers were flat. If Corbat can keep growing revenue, investors will believe his targets are achievable. Citi is creeping towards the light at the end of the tunnel.
- Citigroup reported earnings per share of $1.95 for the second quarter of 2019, an increase of 20% compared with the same period in 2018. Revenue of $18.8 billion was 2% higher than a year earlier.
- Analysts had forecast diluted earnings per share of $1.80 and revenue of $18.5 billion, according to I/B/E/S data from Refinitiv.
- Citi’s revenue from U.S. consumer banking, which makes up just over one-quarter of its overall top line, increased 3% from the same period last year, faster than the previous quarter’s 1% rate.
- Trading revenue fell 5% to $3.8 billion after stripping out a one-off investment gain, having fallen at the same rate in the previous quarter. Fixed income trading fell 4%, while equities fell 9%.
- Citi said on June 27 that it planned to return $21.5 billion to shareholders through buybacks and dividends over the next year.
(Editing by Antony Currie and Amanda Gomez)
© Reuters News 2019