Citigroup Earnings: Strength in Trading and Investment Banking Masks Pressure on NII

Key Morningstar Metrics for Citigroup

• Fair Value Estimate: $70.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Citigroup’s Earnings

Citigroup C posted middling numbers for the third quarter, with a profit of $3.2 billion, or $1.51 per share—down 7% from $1.63 per share in the year-ago quarter. Fee income was good, with notable strength in investment banking and principal transactions revenue, but net interest income continued its downward trajectory. The bank reported a net interest margin of 2.33% in the quarter, down from 2.41% the previous quarter and 2.49% the prior-year quarter. The services segment remains the company’s strength, but the performance of other segments like markets, banking, wealth, and personal banking continues to underwhelm.

The third-quarter numbers resulted in a return on tangible equity of 7% for the bank, materially lower than its medium-term target of 11%-12%. The firm’s overall results are lackluster, given various tailwinds like buoyant asset valuations, above-average trading revenue, and recovering investment banking fees. We are seeing some signs of progress on expenses, but it’s slow, we think its execution remains highly uncertain. We are maintaining our fair value estimate of $70 per share for the bank after incorporating the results.

Fee revenue during the quarter was supported by 7% year-over-year growth in principal transaction revenue and 31% growth in investment banking revenue, partly due to higher investment-grade debt issuance. Overall revenue in the services segment grew by 8% on a year-over-year basis, driven by about an 8% growth in cross-border transaction value in treasury and trade solutions, 22% growth in assets under administration in security services, and a smaller impact from currency devaluation in Argentina. The services segment profits recorded year-over-year growth of 23.0% due to operating leverage, resulting in a strong ROTE of 26.4%.