Citi’s Simplification Not Driving Growth

 Citigroup's (C) performance continued to improve in the third quarter, though the pace of expense reductions appears to be slowing as the company makes progress on its turnaround. In fact, compensation and benefit spending rose slightly during the quarter, reflecting the company's improving revenue performance even as head count fell from 145,000 employees to 143,000. We expect that compensation costs will be more difficult to reduce as profitability rebounds. Equally important, in our view, the $1.4 billion in legal, repositioning, and other one-time costs during the quarter cannot be ignored. We believe such expenses can be considered a cost of doing business for large, complex financial institutions; Citigroup announced another fraud investigation this quarter, for instance. We therefore think Citigroup's newly announced divestitures, including operations in countries from Panama to Egypt, are a sound strategy. However, Citigroup has been continually engaging in acquisitions and divestitures for decades, and none of its global peers have demonstrated an ability to avoid regulatory, legal, and other missteps for very long. We're therefore reluctant to remove all traces of such "unexpected" expenses from our forecasts.

Citigroup's major advantage, in our view, is the bank's presence in fast-growing emerging markets, but the company is not currently experiencing exceptional growth rates due in part to the aforementioned refocusing. In fact, core global consumer loans had declined in nearly all categories at the end of the quarter, though balances grew during the last 12 months, especially outside the United States.

Citigroup's tangible book value now stands at $57.73 per share, up 6% during the year, and return on tangible common equity totaled 8%. At this point, we don't think the company's prospects warrant a significant premium to tangible book value, though we expect to modestly increase our $48 fair value estimate.

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