Citigroup (C) Aided by NII, Streamlining Efforts Amid Cost Woes
Citigroup, Inc. C is likely to benefit from the expected rise in net interest income (NII), its diverse business model and an emphasis on growing its core businesses through the streamlining of its operations internationally. However, escalating costs on the back of business-led investments in technology and transformations, and muted non-interest income, are major near-term headwinds.
Citigroup's NII and net yield on interest-earning assets are expected to benefit from the near-term expectations of higher interest rates. Notably, for the five years ended 2022, its NII witnessed a compound annual growth rate (CAGR) of 1.6%. The rising trend continued in the first half of 2023. For 2023, Management expects NII (excluding Markets) to be slightly above $46 billion. We project NII to rise 7.8% year over year in 2023.
Citigroup has been following a long-term strategy to increase fee-based businesses and reduce its non-core assets. Consequently, the bank has been investing in growing its wealth and commercial banking, treasury and trade solutions, as well as securities service businesses, to expand fee revenues across the Institutional Clients Group segment. These initiatives will strengthen Citigroup's position in the emerging digital space and diversify its revenue source.
The bank's strategy to emphasize growth in core businesses by streamlining its operations globally augurs well. As part of such efforts, it will be closing its retail banking business in the U.K. and expanding its personal banking and wealth management business in the country. Citigroup began the process of ceasing its consumer banking business and commercial banking business in Russia in the third quarter of 2022 and currently has a limited presence in Russia.
Moreover, in January 2022, the company revealed plans to exit the consumer, small business and middle-market banking operations in Mexico, Banco Nacional de México (“Banamex”). Further, in April 2021, it announced its strategic action to exit the consumer banking business from 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea. These efforts will free up capital and likely augment its profitability and efficiency over the long term.
Even though the company has a total debt (comprising long-term debt and short-term borrowings) of $297.48 billion and cash and due from banks, as well as deposits with banks and a net allowance of $284.03 billion as of Jun 30, 2023, its decent cash levels and investment-grade credit ratings makes its debt position seem manageable.
However, Citigroup's financial performance over the years has been negatively impacted by a decrease in its non-interest income, which has had an adverse impact on its top-line growth. Though non-interest income grew in the first half of 2023, the same recorded a decline at a CAGR of 0.3% from 2019 to 2022. Given the low level of investment banking activity, the possibility of declining commissions and fees and lower market prices on assets held under custody and administration, fee income growth is expected to be limited in the upcoming period. While we expect fee income to marginally increase to $26.79 billion in 2023, the same is projected to decline in 2024 and 2025.
C’s expenses have been rising over the years as it continues with its business-led investments, such as revamping its underlying technology, risk management and internal controls. In addition to these costs, higher expenses on compensation, technology and divestitures are likely to weigh on its bottom-line growth. Operating expenses witnessed a four-year (ended 2022) CAGR of 5.2%. The rising trend continued in the first half of 2023. We estimate expenses to grow 5.1% year over year in 2023.
Analysts seem bearish regarding C’s earnings growth prospects. The Zacks Consensus Estimate for the company's 2023 earnings has been revised marginally downward over the past seven days. The company currently carries a Zacks Rank #3 (Hold).
Over the past three months, shares of C have declined 7.2% against the industry's upside of 3.3%.
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Bank Stocks Worth a Look
A couple of better-ranked stocks from the finance space are JPMorgan Chase & Co JPM and OFG Bancorp OFG.
JPMorgan Chase currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised marginally upward over the past 30 days. In the past three months, JPM’s shares have rallied 8.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for OFG Bancorp’s current-year earnings has been revised 9% upward over the past 60 days. Its shares have gained 22.2% in the past three months. Currently, OFG carries a Zacks Rank #2 (Buy).
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