To The Moon

Citigroup is a global diversified financial service company that provides a broad range of financial products and services to consumers and corporations. Citigroup offers services globally, including consumer banking and wealth management, corporate and investment banking, securities brokerage, cash management and transaction services. Citi operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia, and Europe, Middle East and Africa (EMEA).

Investment Overview

Overhang of complex restructuring and regulatory watch; Banamex sale stalled. New CEO Jane Fraser continues to execute on the complex restructuring with a renewed, narrower focus on its core markets, including an exit from 13 global consumer markets. The potential sale of its Mexico business Banamex has since hit a halt and will be floated for an initial public offering (IPO) in 2025 instead. We believe there continues to be an overhang as Citi winds down from the various restructuring efforts and refocuses on its refreshed strategy, which will take time to play out. Citi also continues to engage with various dialogues with regulators (Federal Reserve Board and the Federal Deposit Insurance Corporation) over weaknesses in the group’s data management, on top of its consent order.

High expenses from ongoing investments continue to weigh on profitability and ROE. Cost-to-income ratio continues to run high at ~68% (FY22) compared to peers, as Citi continues to invest in transformation, including risk and control investments, alongside technology investments to address Citi’s consent order. While management acknowledged the need for expenses to normalise over the medium term, in the near term, management expects to bend the curve on expenses towards end-2024, with expenses in legacy franchises still ongoing, guiding for +7% y-o-y operating expenses excluding divestiture-related items. The high expenses will likely weigh on Citi’s medium-term ROTCE target of 11-12% towards 2024-2026.

Shareholder returns hampered by regulatory capital requirements. Citi was one of the worst performers in the latest Fed stress test amongst the eight US global systemically important banks and saw a 30bps increase in its stress capital buffer (SCB) to 4.3%, implying higher CET1 requirements of 12.3% (2Q23: 13.3%). Further, upcoming regulations from Basel III endgame will likely lead to higher capital requirements. While the bank resumed shareholder returns through buybacks and dividends in 2Q23, we believe the pace of shareholder returns could slow as it awaits regulatory clarity, a key negative for shareholders given low valuations of 0.4x P/BV currently.

Recessionary risks. Downside risks include recessionary risks associated with higher than expected inflation, sudden Fed rate cuts. A sharper than expected slowdown in the macroeconomic environment may also lead to slower loan growth and higher delinquencies and credit losses.

Regulatory risks. New consent order, further regulatory requirements or penalties imposed on Citi is negative for its share price.

The company is currently trading at 7.3x forward P/E, c.2 SD below its 10-year historical average pre-pandemic and at a discount to US peers that are trading at 9.0x average, which we view as fair given the overhang of restructuring and regulatory capital requirements.

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DYODD