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Morningstar | Mixed Quarter for Citigroup; Profitability Is Improving, but Growth Isn't Perfect Yet

Narrow-moat rated Citigroup reported decent first-quarter results, with net income of $4.7 billion, or $1.87 per share, on $18.6 billion of revenue. Revenue was a bit lower than the same quarter last year (down 2%), however, solid expense control (down 3%) and a lower effective tax rate helped drive net income growth of 2%. Citi has reduced its average diluted shares by 9%, driving earnings per share growth of 11%. The bank has repurchased roughly 16% of the share base since investor day and has another $4.7 billion of capital left it can return to shareholders in the second quarter of 2019. Overall, Citigroup has certainly made a lot of progress. The bank is on track or already meeting some of the targets it set at its last investor day, mainly ones related to returns on tangible equity and capital returns. However, the bank is lagging in most of the growth goals, and more expense control will still be required to hit many of the efficiency goals. We may adjust our fair value estimate slightly as we reevaluate Citi’s growth prospects, but do not plan any major revisions. We are already modeling in Citigroup missing many of its 2020 goals and think the market is even more pessimistic. Growth may remain an issue, but the improvements in profitability are a welcome development for a franchise that has historically struggled here.

Citigroup's efforts to increase profitability continue to show results, with a return on tangible common equity of 11.9% for the quarter, up from 10.9% for full-year results last year. Management had set a goal of hitting a 12% return on tangible common equity in 2019, and this certainly puts the bank on the right trajectory to meet that goal. The tax rate for the quarter was a bit below where it should be for full-year results, therefore the bank still isn’t quite at the 12% mark; however, a bit more growth combined with continued expense control should reasonably have Citi meeting or getting very close to this profitability goal.

Credit costs did begin to normalize a bit, up 7%; however, most credit metrics remain relatively stable, with the increase in costs being largely driven by expected seasoning within the North American cards portfolio. Costs here are coming in on the higher end of management’s previous guidance, but they are still relatively within the guided ranges.

The Global Consumer Banking unit had a decent quarter, which was somewhat masked by the previous sale of the Hilton portfolio. Normalizing for this, revenue was up 4%, in line with the bank’s growth goals, as retail banking ex-mortgage saw 2% revenue growth and both card units also saw low- to mid-single-digit revenue growth. Average branded cards balances were up 1% while purchase sales were up 6%, and average promotional balances should continue to decrease for this portfolio. Adjusted revenue for Latin America was up 6%, while growth in Asia was 1%. Both marks were okay but a bit below the firm’s longer-term goals.

Within the Institutional Clients Group segment, revenue was down 2%, as the trading and issuance environment remained difficult. Markets and Security Services revenue was down 6%, almost entirely driven by weaker equity markets revenues. This tailwind has hit the entire industry and is not unique to Citi. Citi did manage to gain some share among clients in the quarter within its investment banking unit, which reported strong growth in the quarter. As management has noted, many different initiatives are underway, and the underlying environment will be somewhat unpredictable over the short term for any given segment, therefore there will be some give and take for any given segment in any given quarter.