Citigroup, Inc. C had an impressive performance in the third quarter of 2024 as earnings and revenues topped the Zacks Consensus Estimate. This was mainly driven by solid growth in investment banking (IB) revenues.
Along with the strong quarterly results, the company’s business-transforming initiatives focused on core operations are encouraging. Given this, many investors may be tempted to buy the stock. However, the pertinent question arises whether now is the right time to invest., It is important to delve into the details and analyze various factors at play to answer this.
C Rides on Strong Fee Income & IB Business Growth
Citigroup is riding on strong growth in the IB business. In the first nine months of 2024, IB revenues rose 39% year over year. The upside was driven by increases across debt capital markets, and advisory and equity capital markets.
The company continues to see growth in fee income with strong momentum across services, banking (especially IB) and wealth divisions. In the first nine months of 2024, overall fee revenues saw an uptick of 6%, driven by strength across its underlying fee-based business. However, C’s net interest income fell 2% in the first nine months of 2024 due to high funding costs.
What’s More for the Citigroup Stock in the Long Run?
Fed Rate Cut to Aid Net Interest Income (NII): The Federal Reserve’s aggressive start to monetary policy easing is likely to support Citigroup’s NII over the long term.
During the Sept. 17-Sept.18 Federal Open Market Committee meeting, the Fed lowered the interest rate by 50 basis points after more than four years.
Currently, the Fed fund rates stand at 4.75-5%. The central bank also indicated two more rate cuts for this year and four for 2025. This is expected to bring rates down to 3.4% by the end of next year.
The rate cut is a positive development for banks like Citigroup, Wells Fargo WFC and Bank of America BAC, which are under increasing funding cost pressures. While higher rates led to a jump in Citigroup’s NII, it increased funding costs, which dented the net interest margin (NIM).
For 2024, management expects NII (excluding Markets) to move down slightly on a year-over-year basis.
NIM declined to 2.33% in the third quarter of 2024 from 2.41% in the second quarter of 2024 and 2.42% in the first quarter of 2024. The decline in interest rates will support NIM expansion on the back of stabilizing funding costs.
Focus on Core Operation to Stoke Fee Income Growth: The company has been pursuing growth in core businesses by streamlining international operations. In June 2024, the bank sold its China-based onshore consumer wealth portfolio to HSBC China. It plans to expand personal banking and wealth management businesses in the country.
During the third quarter, JTC announced an agreement to acquire Citigroup’s global fiduciary and trust administration services business, Citi Trust, for $80 million. This divesture aligns with Citigroup’s focus on concentrating resources in areas that drive growth in its wealth business.
The previously announced wind-down of C’s consumer banking businesses in Korea and overall presence in Russia are in progress. Citigroup is on track with the work to separate the two banks in Mexico in the fourth quarter of 2024, and is preparing for a planned IPO of its consumer, small business and middle-market banking operations in Mexico. The company restarted the sales process for the consumer banking business in Poland. In July, it announced the plan to discontinue operations in Haiti.
Since announcing its intention to exit consumer banking businesses across 14 markets in Asia, Europe, the Middle East and Mexico as part of its strategic refresh, Citigroup has exited from Australia, Bahrain, India, Indonesia, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. Such exits will free up capital and help it pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke fee income growth.
Scaled-Back Capital Requirement Plan to Aid Profitability: The Fed’s vice-chair of supervision, Michael Barr, on Sept. 10, outlined proposed Basel regulations. If approved, it would halve the additional capital that big banks need to maintain to safeguard themselves during a financial crisis. The new plan requires banks to hold 9% of additional capital instead of the 19% proposed in the initial plan.
The above modifications are part of the global regulatory framework known as the Basel III endgame, which aims to prevent a recurrence of the 2008 financial crisis. The toned-down capital requirements, if approved, will be beneficial for Citigroup. It will help the company allocate the remaining amount to other initiatives or to increase lending activities.
C’s Regulatory Issues Impede Growth
Citigroup has been facing heightened regulatory scrutiny lately. In August, it made the headlines for breaching the Fed’s Regulation W, which limits intercompany transactions. Those breaches led to discrepancies in its internal liquidity reporting. This was reported by Reuters, citing an internal company document.
This violation is not a single incident that reflects systemic inadequacies in Citigroup's regulatory compliance practices. Per a Bloomberg report, the company’s plan to expand in China met a snag with the U.S. regulators following these regulatory hurdles. The bank is awaiting a clearance letter from the Fed, which China authorities require to verify Citigroup's regulatory standing. Without this letter, the bank cannot proceed with its plans to set up a standalone securities firm in China.
As Citigroup continues to struggle with fixing its regulatory problems, United States Senator Elizabeth Warren urged the Office of the Comptroller of the Currency (“OCC”) to impose growth limitations on the company. This was first reported by Reuters.
In her letter from Oct. 2, 2024, the Senator appealed to the Acting Comptroller, stating that he should take the matter to the third phase of the OCC's four-step program, designed to penalize repeated offenses by large banks. According to Warren, the OCC had only taken the first two steps — issuing private warnings, and implementing public enforcement orders and fines. However, it is time to move to the third phase to limit C’s further growth capability. Warren has slammed Citigroup for being "unable or unwilling to address its repeat and serious failures," referring to the enforcement orders that the bank has piled up over the years, along with millions of dollars in fines.
Citigroup’s Rising Credit Losses Hurt Financials
The company is witnessing a rise in credit losses. In the first nine months of 2024, net credit losses increased 52% from the first nine months of 2023.
At the Barclays conference, Citigroup’s CFO, Mark Mason, stated that the company’s credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that are not vital. The bank is witnessing a pickup in revolving credit while payment rates have started to come down a bit.
For 2024, management expects net credit losses of 3.5-4% in the company’s branded cards business and 5.75-6.25% in retail services.
C Stock Underperforms Industry, Outperforms S&P 500
Year to date, Citigroup’s stock has gained 26.3% compared with the 31.2% rally registered by the industry and 24.2% growth of the S&P 500 composite.
Price Performance
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Analyst Sentiments Mixed for C
Over the past month, the Zacks Consensus Estimate for 2024 earnings has moved upward, while that for 2025 earnings has moved downward, reflecting mixed analyst sentiments.
Estimate Revision Trend
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Citigroup Trades at a Discount
From a valuation standpoint, the company appears inexpensive relative to the industry. It is currently trading at a discount with a forward 12-month price-to-earnings (P/E) multiple of 9.02X, below the industry average of 12.47X. The stock is also significantly cheaper than its peer BAC and WFC’s current forward 12-month P/E of 12.58X and 11.93X, respectively.
Price-to-Earnings F12M
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Final Thoughts on C
As Citigroup announced its third-quarter 2024 earnings, the resurgence of the IB business and strong fee income growth paint a favorable picture for the bank. C’s emphasis on its core business growth by divesting non-core units provides a solid foundation for the future. Moreover, the Fed’s rate cuts are expected to support the bank’s financials.
However, the increased expenses, heightened regulatory scrutiny and credit losses justify a neutral stance on its investment potential. Investors should closely monitor the company's ability to navigate these challenges and capitalize on emerging opportunities to assess its long-term viability. We suggest investors wait for a more appropriate entry point. Those who already own the stock can hold on to it because it is less likely to disappoint over the long term.
Citigroup carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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