We previously covered Citigroup Inc. (NYSE:C) in October 2023, discussing its crown jewel’s promising performance, TTS, with it being the fastest-growing business, well exceeding the previous Investor Day revenue CAGR target of high single digits.
While this outperformance had yet to be translated to its bottom line as it also failed to generate alpha from the elevated interest rate environment, we had maintained our Buy rating on the C stock, attributed to its inherent undervaluation to its book value.
In this article, we shall discuss how our previous Buy ratings have performed excellently, thanks to the C management’s drastic cost optimization plans through 2026, with the market already rewarding the stock with immense rally over the past few months.
Moving forward, while the normalization in interest rates and delinquency rates may trigger moderate headwinds, we maintain our belief that its turnabout is finally in progress, with FQ1’24 likely to bring forth promising results.
C’s Turnaround Investment Thesis Is Finally Here – For So Long That The Management Delivers
C has reported a bottom line beat in its FQ4’23 earnings call, with revenues of $17.44B (-13.4% QoQ/ -3.1% YoY) and adj EPS of $0.84 (-44.7% QoQ/ -27.5% YoY).
For now, readers should not be confused by the bank’s reported TTS revenues of $3.42B (-2% QoQ/ +6.2% YoY), since an Argentinian headwind of -$880M is embedded within. If we are to exclude Argentina, we are looking at an adj growth of +19% YoY instead, sustaining its promising historical growth trend thus far.
Most importantly, TTS remains C’s growth driver, comprising the equivalent 25.8% of its overall revenues (+2.9 points QoQ/ +2.2 YoY), thanks to the growing transaction volume of $25.1T (+9.1% QoQ/ +13% YoY) and stable market share of 10% (-0.1 points YoY/ +1 from FY2021 levels).
At the same time, the bank’s other growth driver, the USPB, reported excellent numbers with total revenues of $4.94B (+0.8% QoQ/ +12.2% YoY) in the latest quarter, thanks to the growing spread between loans and deposits.
Anyone concerned about C’s net income losses of -$2.21B in FQ4’23 may also be rest assured, since they are mostly attributed to the numerous FDIC/ Argentina and Russia/ restructuring adjustments amounting -$4.7B.
On the one hand, while the bank’s overall NIM remains excellent at 2.46% (-0.03 points QoQ/ +0.07 YoY), readers should also note that the Fed is projected to pivot by H1’24, with it likely to trigger headwinds in its bottom line performance until things normalize.
On the other hand, with many other banks expected to experience a similar headwind, we are not overly concerned, since the impact is likely embedded already.
At the same time, readers must note that we may see C’s delinquency rate rises beyond pre-pandemic levels, with January 2024 already bringing forth higher numbers on a QoQ basis as the net charge off rate also exceeds January 2020 levels.
The same has already been reported by its US big bank peers, partly attributed to the uncertain macroeconomic outlook, though well-balanced by the robust labor market and strong discretionary spending.
As a result, interested readers may want to closely monitor its loan/ credit card performance over the next few quarters, since the transitionary period in 2024 may be painful indeed.
Moving forward, we expect to see a dramatic reduction in C’s operating expenses and a consequent boost in its bottom line, as the management plans to cut up to -25% of its headcount by 2026, partly aided by the Banamex spin off by sometime 2024/ 2025.
This is especially since its expenses continues to grow by an accelerated rate of +7.6% YoY in FY2023, even after adjusting for divestitures and FDIC related fees, compared to the lagging revenue growth of +3.4% YoY.
We may see things start to improve from the next quarter onwards, with the CEO already committing to a 5K headcount reduction by March 2024 and most of the affected roles being managers, resulting in an estimated $1B in annualized cost savings by then.
In the medium term, C also guided an overall reduction in its operating expenses to $52B at the midpoint (-4.2%), implying that we may see its bottom line improve after adjusting for the relevant severance and divestiture costs.
This is naturally significantly aided by the promising FY2024 revenue guidance of $80.5B (+4.4% YoY), thanks to the renewed growth in two of its top-line drivers. This includes the growing client base in TTS and increased card borrowing/ spending & lower partner payments in USPB, with Markets likely to remain volatile.
The Consensus Forward Estimates
Perhaps this is why the consensus has moderately raised their forward estimates, with C expected to generate a top/ bottom line expansion at a promising CAGR of +1.8%/ +16.5% through FY2026.
This is compared to the previous estimates of -0.85%/ +6.3% and the historical trend of +1.7%/ +2.5% between FY2016 and FY2023, respectively.
C Valuations
It is apparent that C has been moderately upgraded as well, with its FWD Price/ Sales valuations of 1.32x and P/E valuations of 9.27x recovering from the recent October 2023 bottom of 0.93x/ 6.89x, while finally nearing its 3Y pre-pandemic mean of 2.30x/ 10.30x, respectively.
The upgrade also brings C’s valuations nearer its US big bank peers, such as JPMorgan Chase & Co. (JPM) at 3.22x/ 11.36x and Bank of America (BAC) at 2.66x/ 10.73x, respectively, marking the start of its reversal.
The projected bottom line expansion further validates the market’s conviction about C’s turnaround, with it likely to boost its long-term price target to $82.00, based on the FY2026 adj EPS of $8.85 and the FWD P/E valuation of 9.27x.
So, Is C Stock A Buy, Sell, or Hold?
C 5Y Stock Price
Even then, with an expanding book value of $98.71 (-0.5% QoQ/ +4.9% YoY), it is also immediately apparent that C remains undervalued at current levels, despite the impressive +42.6% rally since the October 2023 bottom and +39.7% rally since our previous article in October 2023.
With its turnaround still in progress, we may see the stock continue to appreciate nearer to its book value, as the macroeconomic outlook normalizes.
For now, investors simply need to wait for it turnaround story to materialize while enjoying the decent forward dividend yield of 3.83%, compared to the sector median of 3.49%, with the decline in its yields from 2023 average of ~4.30% attributed to the recent stock rally.
As a result of its (prospective) dual pronged returns, we are maintaining our Buy rating on the C stock.