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Stock Analyst Update

Citigroup Showing Progress

The narrow-moat bank's efforts for increasing profitability are showing results.

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 Citigroup (C) reported decent second-quarter earnings and a slightly improved outlook. The company reported net income of $4.5 billion, or $1.63 per diluted share, on $18.5 billion of revenue compared with $3.9 billion of net income, or $1.28 per diluted share, a year ago. Citigroup's efforts for increasing profitability are showing results, with a return on tangible common equity of 10.8%, despite holding a relatively large amount of capital, represented by a common equity Tier 1 ratio of 12.1%. The company plans to reduce its capital over time, pending regulatory permission, and has a three-year plan to return at least $60 billion of capital via dividends and repurchases. After the 2018 Comprehensive Capital Analysis and Review results were released, the company announced that it plans to increase its quarterly dividend to $0.45 from $0.32 per share and repurchase up to $17.6 billion of common stock, for total capital returns of up to $22 billion over the next year. This puts the company well on the way to meeting its $60 billion capital return goal and increasing its return on equity. We don't anticipate making a material change to our $78 fair value estimate for narrow-moat Citigroup, and shares currently have a 3-star rating.

Along with second-quarter results, Citigroup raised its outlook for this year's net interest income and seemed positive on its efficiency savings plan. For 2018 net interest income, the company believes that it can reach $3.4 billion compared with a previous outlook of $2.7 billion. This is based on a positive change in loan mix, continued low retail deposit pricing during the first half of the year, and inclusion of an expectation for a September increase in the federal-funds rate. As the company has progressed along its $2.5 billion efficiency savings plan, it now believes that it may overachieve that goal. Part of this extra savings may go directly to shareholders or be reinvested in the business.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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