Citigroup Stays on Track in Third Quarter; 2023 Guidance Next Quarter Will Be Next Key

No-moat Citigroup (C) reported decent third-quarter results. Earnings per share of $1.63 came in ahead of the FactSet consensus of $1.42; the primary difference with our own estimate of $2.01 was provisioning. Core earnings items met our expectations as revenue was $18.5 billion, in line with our estimate of $18.4 billion, and expenses were $12.75 billion, also in line with our estimate of $12.72 billion.

Citigroup’s earnings are set to be quite messy for a while. We think it is more important to ignore the noise and focus on core operations and the bank’s key targets. From an expense standpoint, the bank remained on track to meet its 7%-8% growth rate, excluding divestiture impacts, and we’ll be looking for roughly flat quarter-over-quarter expense growth next quarter. More important will be 2023 expense guidance; we’ll be looking for a net decline on an absolute basis, or a percentage increase of roughly low double digits on a core, ex-legacy franchises basis. Bottom line, we don’t think internal investments and expense increases will be over on a core basis for Citigroup until 2024. The bank maintained its full-year revenue outlook of 7%-8% growth, which seems well within reach. We’ll be hoping for some nominal core revenue growth next year.

Citigroup was our top pick at the start of 2022, and the bank remains the most undervalued in our coverage. We don’t plan on making a material change to our $78 fair value estimate, and our thesis is unchanged: The bank won’t be a top performer operationally compared with peers, but it is simply too cheap. There remains a long road ahead for the bank to grind through the many steps of its turnaround, and time horizon risk is always a key risk when thinking about a turnaround story.