Citigroup (NYSE:C) recently reported its Q3-2023 earnings results, which I’ll discuss in detail. In a nutshell, the bank’s Q3 results showed broad-based improvement in profitability, strengthening the stock’s bullish thesis, with return on tangible common equity (RoTCE) improving to 7.7% in Q3 from 6.4% in Q2. Revenue growth also outpaced expense increases, resulting in better operational leverage relative to the prior quarter. Finally, earnings benefited from the exit of the Taiwan consumer business.
I am bullish on the stock, as Citigroup is on track to meet and potentially exceed its 2023 targets. My bull case rests on an attractive tangible book discount (tangible book value of $86.90 compared to a $40.95 share price) and further savings from the new organizational structure, which is poised to boost results in 2024 and beyond.
Citigroup’s Operational Overview
Citigroup reports results in four main operating segments: Institutional Clients Group at 52.9% of Q3-2023 revenues, Personal Banking and Wealth Management at 33.7% of revenues, Legacy Franchises at 11%, and Corporate/Other at 2.5% of revenues. Let’s analyze how these major segments performed.
Institutional Clients Group saw revenues increase by 12.4% year-over-year, outpacing expenses growth of 9.8% from Q3 2022. Strength was broad-based, with Investment Banking and Securities Services delivering the highest growth year-over-year. Boosted by significant positive operating leverage, net income increased 12.3% year-over-year. Further, RoTCE was 10% in Q3 2023 (11.1% in 2022).
Personal Banking & Wealth Management revenue rose 9.6% year-over-year, better than the 5.5% increase in expenses. Revenues were higher on strength in U.S. Personal Banking, particularly in Retail Services. Net credit losses remained elevated (up 89.1% relative to Q3 2022) and kept net income growth at just 1.4% year-over-year. As a result, RoTCE for the segment was 8.8% in the quarter (10.2% in 2022).
Legacy Franchises continued to exit markets, with the Taiwan consumer business sale closing in the quarter. The key remaining asset – Mexico retail bank Banamex – now accounts for 72.7% of Legacy Franchises revenues. Banamex saw positive operating momentum – revenue growth of 32% year-over-year outpaced expense growth of 27%.
The Legacy Franchises segment was a marginal drag on performance in Q3 2023, with RoTCE coming in at 3.8% as a result of a high cost of risk.
For the bank as a whole, Q3 revenues grew 8.8% year-over-year (2022 saw 5% growth), while expenses were up 6% relative to Q3 2022. RoTCE came in at 7.7% (8.9% in 2022). Furthermore, tangible book value was up 1.8% quarter-over-quarter to $86.90/share, and earnings per share were $1.63/share in Q3, flat year-over-year. Q3-2023 EPS had a $0.12/share positive impact from the Taiwan sale.
Capital and Shareholder Remuneration
Citigroup’s CET1 ratio (which looks at a bank’s capital relative to assets) finished Q3 at 13.5%, up 0.1% quarter-over-quarter, boosted by divestitures and retained earnings. The 13.5% figure represents a 1.2% buffer relative to the Q4-2023 regulatory requirement of 12.3%.
In Q3 2023, the bank returned $1.5 billion to shareholders via buybacks and dividends, resulting in a payout ratio of 43%. For Q4, Citigroup expects “modest buybacks,” which will be highly accretive, given the tangible book discount the stock trades at.
2023 Outlook Gets a Boost
Citigroup boosted its net interest income outlook by $1.5 billion to $47.5 billion. That said, weakness in fees kept the overall revenue and expense outlook unchanged. Here’s the outlook:
Revenues of $78 billion-$79 billion, or growth of 3.6%-4.9% over 2022.
Expenses of $54 billion, or growth of 5.3% over 2022.
Following the rebound in operational performance in Q3, year-to-date revenues are up 6.4%, outpacing expenses growth of 5.4%. As a result, the bank is on track to exceed its revenue target for 2023, assuming stable operating conditions in Q4. Some of the revenue gains will be due to one-off business exits, setting the stage for tough revenue comparisons in 2024.
New Organizational Structure to Result in Cost Savings
Q4 2023 will be the last quarter in which Citigroup reports results using the current segment structure. Starting in 2024, five new Citigroup reportable operating segments will emerge:
- Services (encompasses Treasury & Trade Solutions and Securities Services)
- Markets (encompasses Fixed Income and Equities)
- Banking (encompasses Investment Banking and Corporate Lending)
- Global Wealth Management (encompasses Private Bank, Wealth at Work, and Citigold)
- U.S. Personal Banking (encompasses Branded Cards, Retail Services, and Retail Banking)
An update on exit and stranded costs, as well as expense reductions from the organizational realignment, with costs to achieve, will also be discussed with next quarter’s results. CEO Jane Fraser estimated on the conference call that cost savings from the organizational realignment would become visible in the fourth quarter of 2024.
Is Citigroup Stock a Buy, According to Analysts?
Turning to Wall Street, Citigroup earns a Moderate Buy consensus rating based on eight Buys, 10 Holds, and one Sell rating assigned in the past three months. Additionally, Citigroup stock’s average price target is $50.83, implying 22.7% upside potential.
The Takeaway
Citigroup is already seeing improved profitability with its Q3 results. Nevertheless, management knows it needs to do better and is set to realign the company’s operations starting in 2024, resulting in even higher operating momentum. Given the substantial tangible book discount (greater than 50%) and improving profitability, Citigroup remains attractive from a risk-to-reward ratio perspective.
