Citigroup Inc. C is in the limelight with the Federal Reserve’s aggressive start to monetary policy easing.
During the Sept. 17-18 FOMC meeting, the Fed lowered the interest rate by 50 basis points after more than four years. Currently, the Fed fund rates stand in the 4.75-5% range.
The central bank also indicated two more rate cuts this year and four in 2025. This is expected to bring rates down to 3.4% by the end of next year.
The rate cut is a positive development for banks like Citigroup, Wells Fargo WFC and Bank of America BAC, which are under increasing funding cost pressure. While higher rates led to a jump in Citigroup’s net interest income (NII), it increased funding costs, which dented the net interest margin (NIM).
In first-half 2024, C’s NII dropped 1% year over year. For 2024, management projects NII (excluding Markets) to be modestly down from 2023 levels.
NIM declined to 2.41% in the second quarter compared with 2.48% registered in the year-ago quarter. With the interest rates coming down, it will support NIM expansion on the back of the stabilization of funding costs.
Lower rates will also result in a gradual improvement in banks’ asset quality as borrowers repay loans. The lending scenario, which has been subdued of late, is expected to improve as the lower rate ignites loan demand. Hence, banks, including C, WFC and BAC, are expected to gain from a solid rebound in loan demand.
With an improving market scenario, rate cuts and Citigroup’s business streamlining initiatives, investors are bullish on C stock.
In the past year, the shares of C stock have rallied 58.9% compared with the industry’s growth of 50%. It also outperformed the S&P 500 and its peers, BAC and WFC, in the same time frame.
1-Year Price Performance
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Other Factors Supporting Citigroup Stock
Organizational Overhaul to Reduce Costs: The company is carrying out a comprehensive organizational overhaul to improve its performance, lower costs and simplify businesses.
Citigroup completed its organizational simplification in first-quarter 2024, resulting in a simpler management structure and improved accountability. The new operating model consists of five reportable segments and a new financial reporting structure.
The reorganization trimmed management layers and now operates under eight layers rather than 13. As part of the turnaround, Citigroup aims to shrink its workforce by 20,000 over the next two years. With fewer layers, increased spans of control and significantly reduced bureaucracy and unnecessary complexity, the company will be able to operate more efficiently.
Scaled-Back Capital Requirements Plan: The Fed’s vice-chair of supervision, Michael Barr, on Sep. 10, outlined proposed Basel regulations. If approved, it would roughly halve the additional capital that big banks would need to maintain to safeguard them in the event of a financial crisis. The new plan requires banks to hold 9% of additional capital instead of the 19% proposed in the initial plan.
The modifications above are a part of the global regulatory framework known as the Basel III endgame, which aims to prevent a recurrence of the 2008 financial crisis. The changes relate to the capital surcharge for global systemically important banks (G-SIBs), including C, WFC and BAC.
The toned-down capital requirements, if approved, will be beneficial for Citigroup. It will help the company allocate the remaining amount to other initiatives or to increase lending activities. This will lead to increased profitability.
Focus on Core Operation: The company has been pursuing growth in core businesses by streamlining international operations. This June, it sold its China-based onshore consumer wealth portfolio to HSBC China. The bank winded down its U.K. retail banking business and plans to expand personal banking and wealth management businesses in the region. This month, JTC announced an agreement to acquire Citigroup’s global fiduciary and trust administration services business, Citi Trust for $80 million. This divesture aligns with Citigroup’s focus on concentrating resources in areas that drive growth in its wealth business.
The previously announced wind-down of the company’s consumer banking businesses in Korea and overall presence in Russia are in progress. C is preparing for a planned IPO of its consumer, small business, and middle-market banking operations in Mexico. It restarted the sales process for the consumer banking business in Poland. In July, the company announced its plan to discontinue operations in Haiti.
Since announcing its intention to exit consumer banking businesses across 14 markets in Asia, Europe, the Middle East and Mexico as part of its strategic refresh, the company exited from Australia, Bahrain, India, Indonesia, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. Such exits will free up capital and help it pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke fee income growth.
With these initiatives, the company projects revenues to register a compounded annual growth rate (CAGR) of 4-5% by 2026-end.
Image Source: Citigroup
Citigroup’s Hurdles: Regulatory Issues & Rising Credit Losses
Citigroup has been facing heightened regulatory scrutiny lately. In August, it made the headlines for breaching the Federal Reserve’s Regulation W, which limits intercompany transactions. Those breaches led to discrepancies in its internal liquidity reporting. This was reported by Reuters, citing an internal company document.
This violation is not a single incident that reflects systemic inadequacies in Citigroup’s regulatory compliance practices. In July, the U.S. bank regulators penalized the company with a $136 million fine for failing to make adequate progress in fixing data management issues.
Per a Bloomberg report, its plan to expand in China has met a snag with the U.S. regulators following these regulatory hurdles. The bank is currently awaiting a clearance letter from the U.S. Federal Reserve, which is required by Chinese authorities to verify Citigroup’s regulatory standing. Without this letter, the bank cannot proceed with its plans to set up a standalone securities firm in China.
The company is witnessing a rise in credit losses. At the Barclays conference, Citigroup’s CFO, Mark Mason, stated that Citigroup’s credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that aren’t vital. The company is witnessing a pickup in revolving credit while payment rates have started to come down a bit.
For 2024, management expects net credit losses in the band of 3.5-4% in the company’s branded cards business and 5.75-6.25% in retail services. The cost of credit is expected to be $2.7 billion.
Should Investors Keep Citigroup Stock on Their Radar?
Citigroup’s business restructuring and organizational overhaul efforts, lower interest rates and a rise in loan demand are expected to support its financials in the upcoming period.
Sales Estimates
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Earnings Estimates
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As the company is expected to witness an increase in credit losses in the near term, its earnings will be under pressure. Analysts moved their earnings estimates lower in the past month for 2024. Nonetheless, considering its bright long-term prospects, analysts have kept 2025 estimates unchanged.
Estimate Revision Trend
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From a valuation standpoint, Citigroup appears inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month price-to-earnings (P/E) multiple of 9.05X, below the industry average of 11.43X.
P/E F12M
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To summarize, despite the solid growth potential Citigroup offers over the long run and its favorable valuation, it is not advisable to add this stock to one’s portfolio right now, considering the ongoing legal scrutiny and rising credit losses, which might hamper its performance.
Even though the rate cut offers hope to Citigroup, it will take a longer time for the benefits of the same to be visible in its financials. Prospective investors should wait to see how the bank navigates through this rate cut to optimize its financial performance.
Thus, investors should keep this Zacks Rank #3 (Hold) stock before on their radar and wait for a better entry point. Those who already own the C stock in their portfolio can retain it because it is less likely to disappoint over the long term, given strong fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Source: finance.yahoo.com
