Narrow-moat-rated Citigroup’s (C) first-quarter results were in line with our expectations, and we are leaving our $78 fair value estimate unchanged. Operating expenses grew just 2% year over year despite mid-single-digit growth in employee compensation and technology spending. Return on average equity came in at an acceptable 9.7%, with return on average assets finally closing in on the 1% mark.
Solid capital markets performance produced a 6% increase in principal transactions revenue and a 9% increase in administrative and other fees year over year, and we believe Citigroup’s institutional client business is positioned well for continued success, thanks to the firm’s global footprint and diverse lines of business. Capital return continues to be a hallmark of the new Citigroup--shares outstanding have declined 7% over the past 12 months. With a common equity Tier 1 ratio of just over 12% and potential regulatory relief on the horizon, Citigroup is well positioned to boost leverage and returns over the next five years.
Consumer loan growth (in constant dollars) kept pace with broad economic growth over the past 12 months, totaling 2.9% in North American and 3.3% in the rest of the world, including 5.3% growth in Latin America. Though seasoning of the company’s U.S. consumer lending portfolio contributed to a 3% increase in credit costs over the past 12 months, consumer banking income grew 37% over the same period.
On balance, we expect Citigroup’s international exposure to deliver better growth than peers located primarily in developed markets. That said, differences in economic performance and varying regulatory regimes also produce more volatility at the local level. For example, low-double-digit growth in Hong Kong was offset by a shrinking Korean portfolio over the past year. Furthermore, the fortification of the global financial system post-2009 could increase the relative importance of geopolitical risk in the years to come.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.