Citigroup Earnings: Although Revenue Growth Is Working, We Won’t Know Until 2024 if Expenses Are

No-moat Citigroup C 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.

Given that results largely met or exceeded our expectations for the quarter, particularly on a core-franchise basis, and given that we still are not confident the current revenue growth trajectory is sustainable, we do not plan to make a material change to our current fair value estimate of $68. We view shares as undervalued, but caution investors that a lot of work remains for Citigroup in this turnaround effort. More insight into the 2024 expense outlook next quarter will be the next key update.

The bank is outperforming on revenue growth, particularly within the Institutional Clients Group, or ICG, segment, whose revenues were up 12% year over year in the quarter, and 2% sequentially. Treasury and Trade Solutions, or TTS, and securities services are performing well, and while the personal banking unit has not grown as much, year-to-date growth of 8% is still solid, largely driven by the cards business. At this pace, for 2023 we expect the bank will meet its longer-term goal of 4%-5% annual revenue growth. We see growth at 5% or more for the core business. A key question is how sustainable this level of revenue growth is. The bank has seen a large increase in net interest income drive this year’s growth and we’re not sure how much more of a boost is left there. So far, the bank’s revenue plan is working, but we think Citi will need to prove itself all over again in 2024.