Citigroup, Inc. (NYSE:C) reported mixed results on Monday. The Wall Street bank managed to beat on earnings but missed revenue expectations. Even though Citigroup’s shares are still priced at a discount to accounting book value, growing downside risks and the Fed’s scaled back interest path are weighing on the investment thesis. Citigroup is buying back a ton of shares, but that may not be enough to entice investors to buy.
Citigroup – First Quarter Overview
Citigroup has had a moderately decent first quarter.
In the first quarter of 2019, Citigroup’s revenues decreased two percent to $18.58 billion compared to the first quarter of 2018 when the bank pulled in $18.87 billion. The reported revenue figure slightly missed consensus revenue expectations of $18.63 billion. Citigroup’s earnings, however, were not that bad: Q1-2019 earnings were reported at $4.71 billion, up 2 percent compared to the year-ago period. On a per-share basis, Citigroup raked in $1.87/share in profits, marking an eleven percent year-over-year increase. The analyst consensus estimate was for earnings per share of $1.80.
Source: Citigroup Investor Presentation
Citigroup’s consumer business remains in good shape. The bank’s largest business enjoyed 4 percent year-over-year revenue growth to $8.45 billion in the last quarter and benefited from an operating margin improvement. Total division earnings jumped 14 percent year over year to $1.44 billion.
Citigroup runs a tight ship and has focused relentlessly on bringing down its costs. Measured by its efficiency ratio, Citigroup has had some success doing so: The efficiency ratio, which measures expenses as a percentage of revenue, has continuously declined in 2017/8 and fell to a new low of 57.2 percent in the first quarter of 2019.
Net Interest Income Growth
Citigroup’s net interest income has continually increased throughout 2018 as the Fed raised short-term interest rates: In an environment of rising rates, banks can charge more money for loans which has a positive earnings impact.
Citigroup’s net interest income has risen from $10.9 billion in Q1-2018 to $11.8 billion in Q1-2019, reflecting an increase of 7.9 percent. That said, though, the Fed has muted its interest rate outlook in March due growing downside risks and slowing economic growth.
Q1-2019 Capital Returns
Citigroup returned billions of dollars in capital to shareholders in Q1-2019. In the first quarter of 2019, Citigroup bought back 66 million shares and returned a total of $5.1 billion to investors throughout buybacks and dividends.
Book Value Growth
Citigroup’s tangible book value keeps growing. Citigroup reported a first quarter 2019 tangible book value of $65.55/share, which reflected 9.0 percent growth since the fourth quarter of 2017.Source: Achilles Research
Citigroup’s shares are still priced at a discount to accounting book value and are the cheapest in the sector. Here’s how Citigroup’s P/B-ratio compares against the price-to-book-value-multiples of Bank of America (BAC) and Wells Fargo (WFC).
Investors in Citigroup face two major risk factors:
1. A U.S. recession would likely negatively affect the bank’s ability to grow its deposit and loan base. Citigroup would also most certainly see an increase in loan defaults and charge-offs;
2. The Fed’s scaled back interest rate path limits Citigroup’s net interest income growth.
With the Fed muting its economic (and interest rate) growth outlook for the remainder of 2019, Citigroup will have a harder time going forward to produce net interest income growth. Downside risks could grow even further in 2019 if a U.S.-China trade deal doesn’t materialize and corporate earnings growth slows throughout the year. Though shares are still priced at a discount to accounting book value, the overall value proposition is not that convincing.
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