Company Reports

No-moat Citigroup reported better-than-expected first-quarter earnings at $1.58 per share compared with the FactSet consensus of $1.18. There was an incremental $251 million FDIC special assessment charge related to the FDIC increasing its estimated loss from the March 2023 banking events. Other non-recurring expenses included $225 million of restructuring charges related to organizational simplification. We do not anticipate a material change to our $68 per share fair value estimate for the bank as we incorporate first-quarter results.

Citigroup has an international commercial banking franchise and a domestically focused retail banking unit. The bank's commercial operations—services, markets, and banking segments (which were previously grouped under Institutional Client Group, or ICG)—has large trading, investment banking, international corporate banking, and custody operations. The commercial banking operation is Citi's most unique business, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for cross-border companies. While this global presence offers some advantages, it is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for the commercial banking business have been mixed.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

No-moat-rated Citigroup posted a disappointing set of numbers in the fourth quarter with a loss of $1.8 billion or $1.16 per share. The quarterly loss was primarily due to various nonrecurring charges, including $1.7 billion for an FDIC special assessment charge for uninsured deposits of certain failed banks during the banking turmoil, $0.8 billion for restructuring charges related to organizational simplification, $0.9 billion to account for the impact of Argentina currency devaluation, and $1.3 billion in transfer risk related to Russia and Argentina. Citi’s earnings per share is estimated to be $0.84 per share after excluding the nonrecurring charges.

Citigroup has an international commercial banking franchise and a domestically focused retail banking unit. Within the bank's commercial operations (called the institutional clients group, or ICG), Citi has large trading, investment banking, international corporate banking, and custody operations. ICG is Citi's most unique business unit, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for companies with cross-border needs. While this global presence offers some advantages, there are weaknesses. It is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for ICG have been mixed.

Citigroup has an international commercial banking franchise and a domestically focused retail banking unit. Within the bank's commercial operations (called the institutional clients group, or ICG), Citi has large trading, investment banking, international corporate banking, and custody operations. ICG is Citi's most unique business unit, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for companies with cross-border needs. While this global presence offers some advantages, there are weaknesses. It is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for ICG have been mixed.

No-moat Citigroup reported earnings that were ahead of our expectations, with EPS of $1.63 compared with our forecast of $1.50 and FactSet consensus of $1.24. Fees and net interest income were better than expected, while expenses and provisioning were in line. While the bank beat quarterly estimates, there were no material changes to full-year guidance. As we run the numbers, we have a hard time not seeing the bank beat its own full-year revenue guidance of $78 billion-$79 billion. The bank remained on track with expenses, and we still think $54 billion is a reasonable full-year number.

Citigroup has an international commercial banking franchise and a domestically focused retail banking unit. Within the bank's commercial operations (called the Institutional Clients Group, or ICG), Citi has large trading, investment banking, international corporate banking, and custody operations. ICG is Citi's most unique business unit, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for companies with cross-border needs. While this unique global presence offers some advantages, there are weaknesses as well. It is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for ICG have been mixed.

No-moat-rated Citigroup reported earnings that were largely in line with our expectations, with EPS coming in at $1.33 compared with our forecast of $1.34. The full-year revenue outlook was unchanged at $78 billion-$79 billion, and the expense outlook was unchanged at $54 billion. Within revenue, net interest income is outperforming while markets, investment banking, and wealth revenue remain under some pressure. Underneath the surface, management raised its NII outlook by $1 billion, implying weaker fee performance for the year. We view current NII dynamics as “peak of the cycle,” with some of the outperformance on NII likely to go away as the cycle plays out. While we acknowledge some of the cyclical headwinds at play for fees, we view them as more core to the overall business plan, so on net we view the stability in revenue slightly negatively. One strong point remains the bank’s services and TTS revenue, which continue to do well and have been a consistent growth engine.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Citigroup has an international commercial banking operation and a domestically focused retail banking segment. Within the bank's commercial operations (called the Institutional Clients Group, or ICG), Citi has large trading, investment banking, international corporate banking, and custody operations. ICG is Citi's most unique business unit, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for companies with cross-border needs. While this unique global presence offers some advantages, there are weaknesses as well. It is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for ICG have been mixed.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

No-moat-rated Citigroup was our top pick at the start of 2022 and remains one of the more undervalued banks under our coverage in 2023. First-quarter results supported our multistep thesis for the name as the overall revenue and expense outlooks remained unchanged, the bank sold off additional business units, and first-quarter results were even better than we expected. Going into the quarter, we felt that the largest banks would be fine. While profitability would face some pressure in the short term, in the longer term it would not be destroyed. With no major disappointments, and with the bank seeming to handle the current turmoil just fine, we do not plan on making a material change to our fair value estimate of $75, barring any surprises on the upcoming earnings call. We continue to view Citigroup as an undervalued stock with idiosyncratic catalysts that could help unlock value over the next several years.

As we look at the U.S. banks, we believe the sector is currently undervalued. However, in an effort to help investors focus their efforts, we are highlighting Comerica, U.S. Bancorp, and Citigroup—each has its own risk/reward setup.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

Citigroup has an international commercial banking operation and a domestically focused retail banking segment. Within the bank's commercial operations (called the Institutional Clients Group, or ICG), Citi has large trading, investment banking, international corporate banking, and custody operations. ICG is Citi's most unique business unit, as its global footprint is hard to replicate. This international presence will help Citigroup remain a bank of choice for companies with cross-border needs. While this unique global presence offers some advantages, there are weaknesses as well. It is expensive and complicated to maintain, and the bank's markets desk also produces low returns. As a result, returns for ICG have been mixed.

No-moat-rated Citigroup reported decent fourth-quarter earnings. Earnings per share of $1.16 came in roughly in line with the FactSet consensus of $1.14, and the primary difference with our own estimate of $1.00 was a beat on net interest income, or NII.