Earnings Analysis: Citigroup (C)

Citigroup announced fourth quarter and fiscal year 2018 annual results back on January 14.  Results for the quarter were a little mixed, as earnings of $1.61 beat estimates of $1.55, but revenues of $17.1B missed expectations of $17.59B.  While the results weren't what the street was looking for and the initial numbers provided a hit to the stock's price, management's subsequent commentary provided a significant change in sentiment and we've watch the stock price raise closer to its tangible book value in the two weeks since. 

Looking a little deeper into the numbers themselves, revenues were mostly hit due to an under performing fixed income market in addition to assets that were sold off as the company continues to shed its remaining legacy businesses that doesn't fit overall goals.  The fixed income issue is something that has been seen across all money center banks and Citigroup is one of the largest players in this space, so it is not a result that is fully under their control.  Something to add to the overall encouragement is the 4% reduction in expenses, showing disciplined control and flexibility with their costs when macro events impact the company.  This is also seen through how money flowed through to earnings despite lower revenues.  In the company's commentary, they commented on how they continue to see strength in the overall economy, despite what the market has been indicating as of late.  However, if that landscape changes, they have and are prepared to pull a number of levers to be agile with business conditions while also ensuring they continue to invest in their long-term view.  Return of total common equity (RoTCE) results for the year were at 10.9%, which handily beat their expectations of 10.5%.  This is turning out to be the measure to watch, despite the fact that the focus on FY18 was the company's efficiency ratio, which missed their goals and ended up being lower than last year by nine basis points. Global Consumer Banking (GCB) increased revenues by 3% on the year while Institutional Clients Group (ICG) increased revenues by 1%.  US Mortgages were down significantly, but deposits were still on the rise.  Latin America grew 8% on the year, while Asia saw some pressure this year due mostly to lower investment revenues related to poor market conditions.  Credit trends were mostly stable as credit losses rose slightly related to portfolio volume growth and overall seasoning of the portfolio.  Meanwhile, in ICG the total banking group increased revenues 5% from a year ago with Treasury & Trade Solutions leading the way with 7% growth.  Total Markets and Securities Services took a beating, though, with revenues down 11% from last year, mostly driven by the 21% decrease in the fourth quarter for the Fixed Income Markets.  Trading was volatile in the fourth quarter and the company found the environment to be challenging.

Looking forward to fiscal year 19, the management team saw continued strength ahead.  The company returned $18.4B in the form of dividends and share buybacks which resulted in an eight percent reduction in overall shares.  All signs lead management to believe that they will continue to be able to distribute capital which will allow them to reach their goal of $60B by the end of 2020.  They have changed their metric focus to the RoTCE and they are increasing their target from this year's results of 10.9% to 12%.  

Nothing in this report gives me reason to feel like I should be preparing for some form of recession.  While the Fed will likely slow the rate at which it increases rates and improves banking margins, the increase is still in front of us and there's less likely a recessive economic risk that could cause those margins to contract.  I expect the company was in the market buying shares hand over fist while the price was below TBV.  I still expect them to be in there, but I also expect that they'll slow the rate of purchase to see if the market takes the price back down.  Speaking of TBV, I am targeting a 2019 TBV of $67.65.  I believe the stock can receive a 1.1 multiple of that price, too, setting my 2019 price target at $74.50.  I'm also expecting the annual earnings number to hit at $7.50.  Despite the rise in the price since the earnings release, I am going to keep my ranking at a 1 for now, but caution that there is room for the stock price to pull back on any Fed or Chin Tariff news.  Keep prepared for this.

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.