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Citigroup (C) Capital Buffer Rises: Should Investors Be Anxious?
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Earlier this week, Citigroup (C - Free Report) announced that its stress capital buffer (“SCB”) requirement will increase from 2.5% at present to 3%, beginning fourth-quarter 2021, for a four-quarter window. This follows the Federal Reserve’s stress test results last week, in which all 23 participating banks passed.
Subsequently, a plethora of banks cheered investors by announcing impressive capital deployment plans. Notably, Morgan Stanley (MS - Free Report) announced plans to double its quarterly dividend to 70 cents per share, effective third-quarter 2021. Similarly,Goldman Sachs (GS - Free Report) , JPMorgan (JPM - Free Report) and Bank of America (BAC - Free Report) disclosed their intention to raise the dividend by 60% to $2 per share, 11% to $1 per share and 17% to 21 cents per share, respectively. Further, many banks authorized bigger share repurchase plans.
In stark contrast to its peers, Citigroup has kept dividend payments unchanged at the current level of 51 cents per share and has refrained from increasing its share repurchase plan. This is expected to have been disheartening for its investors.
We note that the company’s higher SCB has led to higher capital requirements, with the required CET1 ratio rising to 10.5% from the previous 10%. With higher capital ratio requirement, a company typically has less flexibility to deploy capital in share buybacks and dividends.
Citigroup management’s outlook for second-quarter 2021 was also unpromising. At an investors’ conference mid-June, the company’s chief financial officer, Mark Mason, noted that trading revenues might disappoint. Notably, trading revenues are likely to decline year over year “in the low 30s percent”.
Moreover, its investment banking revenues are anticipated to be down “in the mid-to-high single-digit range”. Per management, North America consumer banking revenues are “likely to be down at similar level to what they were in the first quarter in terms of the year-over-year performance”. Particularly, in first-quarter 2021, the company reported revenues of $4,428 million, witnessing a year-over-year decline of 15%.
It has also been spending on technological and operational transformation after its inefficiency attracted regulatory scrutiny last year. Accordingly, second-quarter expenses are likely to increase to “somewhere in the middle” of $11.2 billion and $11.6 billion.
The near-term bottlenecks have been uninspiring for the company’s stock. Shares of Citigroup have gained 14.7% in the year-to-date period, underperforming the industry’s rally of 26.1%.
Image Source: Zacks Investment Research
Beyond the Rough Terrain
Despite such muted investor sentiments, it is worth noting that the company is taking the right steps to improve its operational efficiency. Markedly, Citigroup has been emphasizing core businesses through expense management and streamlining operations internationally. Further, the company continues to optimize its branch network, with a focus on core urban markets, improving digital channels and reducing branches.
Additionally, Citigroup has been winding up underperforming businesses and presence in non-strategic geographies to recycle capital in attractive fee-based businesses.In line with this,in April, the company announced a major action, whereby the global consumer banking segment will be exiting 13 markets to focus more on operations in Asia and EMEA on four wealth centers — Singapore, Hong Kong, the UAE and London.
Moreover, ongoing investments in branded cards support the company’s growth strategy. Such efforts offer a long runway for growth over an extended period.
Further, management noted that it will continue share repurchases when its stock price is below tangible book value per share.If successfully materialized, the move should boost tangible book value and earnings per share. Also, the company’s efforts to exit non-core businesses will provide excess capital, which can be put forward toward deployment plans.
Parting Thoughts
Looking past the near-term headwinds, Citigroup exhibits encouraging prospects. The company’s strategy to reduce operational complexity and focus on profitable businesses will likely support its financials over the long term.
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.
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Citigroup (C) Capital Buffer Rises: Should Investors Be Anxious?
Earlier this week, Citigroup (C - Free Report) announced that its stress capital buffer (“SCB”) requirement will increase from 2.5% at present to 3%, beginning fourth-quarter 2021, for a four-quarter window. This follows the Federal Reserve’s stress test results last week, in which all 23 participating banks passed.
Subsequently, a plethora of banks cheered investors by announcing impressive capital deployment plans. Notably, Morgan Stanley (MS - Free Report) announced plans to double its quarterly dividend to 70 cents per share, effective third-quarter 2021. Similarly,Goldman Sachs (GS - Free Report) , JPMorgan (JPM - Free Report) and Bank of America (BAC - Free Report) disclosed their intention to raise the dividend by 60% to $2 per share, 11% to $1 per share and 17% to 21 cents per share, respectively. Further, many banks authorized bigger share repurchase plans.
In stark contrast to its peers, Citigroup has kept dividend payments unchanged at the current level of 51 cents per share and has refrained from increasing its share repurchase plan. This is expected to have been disheartening for its investors.
We note that the company’s higher SCB has led to higher capital requirements, with the required CET1 ratio rising to 10.5% from the previous 10%. With higher capital ratio requirement, a company typically has less flexibility to deploy capital in share buybacks and dividends.
Citigroup management’s outlook for second-quarter 2021 was also unpromising. At an investors’ conference mid-June, the company’s chief financial officer, Mark Mason, noted that trading revenues might disappoint. Notably, trading revenues are likely to decline year over year “in the low 30s percent”.
Moreover, its investment banking revenues are anticipated to be down “in the mid-to-high single-digit range”. Per management, North America consumer banking revenues are “likely to be down at similar level to what they were in the first quarter in terms of the year-over-year performance”. Particularly, in first-quarter 2021, the company reported revenues of $4,428 million, witnessing a year-over-year decline of 15%.
It has also been spending on technological and operational transformation after its inefficiency attracted regulatory scrutiny last year. Accordingly, second-quarter expenses are likely to increase to “somewhere in the middle” of $11.2 billion and $11.6 billion.
The near-term bottlenecks have been uninspiring for the company’s stock. Shares of Citigroup have gained 14.7% in the year-to-date period, underperforming the industry’s rally of 26.1%.
Beyond the Rough Terrain
Despite such muted investor sentiments, it is worth noting that the company is taking the right steps to improve its operational efficiency. Markedly, Citigroup has been emphasizing core businesses through expense management and streamlining operations internationally. Further, the company continues to optimize its branch network, with a focus on core urban markets, improving digital channels and reducing branches.
Additionally, Citigroup has been winding up underperforming businesses and presence in non-strategic geographies to recycle capital in attractive fee-based businesses.In line with this,in April, the company announced a major action, whereby the global consumer banking segment will be exiting 13 markets to focus more on operations in Asia and EMEA on four wealth centers — Singapore, Hong Kong, the UAE and London.
Moreover, ongoing investments in branded cards support the company’s growth strategy. Such efforts offer a long runway for growth over an extended period.
Further, management noted that it will continue share repurchases when its stock price is below tangible book value per share.If successfully materialized, the move should boost tangible book value and earnings per share. Also, the company’s efforts to exit non-core businesses will provide excess capital, which can be put forward toward deployment plans.
Parting Thoughts
Looking past the near-term headwinds, Citigroup exhibits encouraging prospects. The company’s strategy to reduce operational complexity and focus on profitable businesses will likely support its financials over the long term.
Citigroup currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.
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