Solid Q4 Results for Citigroup; Stock Remains Most Undervalued Among Banks

Citigroup Stock at a Glance

Current Morningstar Fair Value Estimate: $75

Stock Star Rating: 5 Stars

Economic Moat Rating: None

Moat Trend Rating: Stable

Citigroup Earnings Update

No-moat-rated Citigroup (C) reported decent fourth-quarter earnings. Earnings per share of $1.16 came in roughly in line with the FactSet consensus of $1.14, and the primary difference with our own estimate of $1.00 was a beat on net interest income, or NII.

Messy Earnings to be Expected

Citigroup’s earnings are set to be quite messy for a while, and 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 met its 7%-8% growth rate for 2022, ex-divestiture impacts, and guidance for 2023 of $54 billion implied roughly $3.5 billion in expense growth, which was actually a bit below the core expense growth we originally projected for 2023. As a reminder, the bank still has a quarterly run rate of $1.8 billion in legacy franchise expenses, much of which is expected to go away as the bank sells off these units. Beyond 2023, we think 2024 will be a critical year, as we believe the bank will start to need expense declines to have a chance of meeting its profitability goals.

The bank also met its full-year revenue outlook of low-single-digit percentage growth, and we were pleasantly surprised by the 2023 outlook. We were hoping for mid-single-digit growth for core revenue, and guidance for roughly 5% growth met these expectations. This outlook implies some continued NII growth and fee growth in 2023. We would expect fees for the industry to remain under some pressure in 2023, and if the bank can meet this outlook, it would be a positive step.

Citigroup Stock Most Undervalued Among Banks

Citigroup was our top pick at the start of 2022, and the bank remains the most undervalued in our coverage. While shares only performed in line with peers during 2022, we still see a significant disconnect between our estimate of intrinsic value and the current market price. With no disappointments in the 2023 outlook, we don’t plan on making a material change to our fair value estimate of $75, barring any surprises on the upcoming earnings call.