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Morningstar | Citigroup Is Largely Meeting Its Investor Day Targets, Plans Next Step Up in ROTCE in 2019

Narrow-moat-rated Citigroup reported solid fourth-quarter results, with net income of $4.2 billion, or $1.61 per share, on $17.1 billion of revenue. Revenue was a bit lower than the same quarter last year after normalizing for one-time effects of tax reform, but expense control was excellent, with expenses down 4%. This allowed net income to grow 14%, with EPS up 26%, aided by continued share repurchases. Citigroup repurchased roughly $18.4 billion in shares, reducing the year-end share count by 8%. The bank has now repurchased roughly 13% of the share base since investor day, and has another $9.8 billion of capital left to return to shareholders in the first and second quarters of 2019. Overall, we have been pleased with the progress Citigroup has made, and the bank is largely meeting the targets it set at its last investor day. We are increasing our fair value estimate to $80 per share from $77.

Citigroup's efforts to increase profitability continue to show results, with a return on tangible common equity of 10.9% for full-year results, up from 8.1% last year. This is on track with the bank’s updated goals, and management reiterated its goal of hitting a 12% return on tangible common equity in 2019. We are encouraged that, despite only marginal revenue growth, expenses were well-managed and actually decline year over year. This allowed the bank’s efficiency ratio and overall profitability to improve. Even in the face of a tougher trading environment and limited revenue growth for the branded card portfolio, the bank was able to manage expenses to meet its goals. This supports management’s previous assertions that while there may be some give and take along the top line, they felt the goals they set were realistic enough that they were not fully dependent on hitting aspirational growth levels. If Citigroup can continue meeting its goals throughout 2019, we believe shares offer value at today’s prices.

End-of-period loan balances were up 4% year over year, partially helped by growth within retail services given the L.L. Bean portfolio acquisition. Credit costs remained largely range-bound, although 90-day-plus delinquency rates in North America GCB did barely tick up to a new two-year high at 0.97%. We would not be surprised to see additional gradual seasoning of the bank’s consumer credit card portfolios, which we are baking into our forecasts. The bank’s net interest income grew strongly during the quarter, as the core accrual net interest margin also grew. Overall, we continue to believe we will see some additional net interest margin expansion for the industry in 2019, and much of the trading and legacy asset drags on NIM for Citi are now behind it.