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Will Citigroup's (C) Business Transformation Moves Aid in 2024?
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Citigroup Inc.’s (C - Free Report) shares have rallied 17.6% so far this year, outperforming the industry’s rise of 14%. This marks a turnaround from the dismal 2022 performance, wherein the stock lost 22.1%.
Chief executive officer Jane Fraser’s strategic initiatives, including business divestitures and a major organizational overhaul at Citigroup to boost the company’s performance, have likely driven the recovery in the bank’s stock price.
Also, management’s projections for the fourth quarter and full-year 2023 indicate encouraging performance.
The decent momentum in deal-making, particularly observed in the debt capital markets in third-quarter 2023, is likely to continue in the fourth quarter. In fact, the company expects investment banking (IB) revenues to rise in the high-single-digit range sequentially in the quarter ending December.
However, given the muted client activity across a broad set of asset classes during the quarter, market revenues for the fourth quarter are anticipated to decline 15-20% on a sequential basis.
The company expects revenues for the full year (excluding 2023 divestiture-related impacts) to be at the lower end of the $78-$79 billion band. The outlook indicates a rise from $75.3 billion recorded in 2022.
The Zacks Consensus Estimate for Citigroup’s 2023 revenues is pegged at $79 billion, indicating a year-over-year increase of 4.8%. We estimate the metric to rise 6% in the current year.
Management anticipates expenses to be approximately $54 billion in 2023 (excluding 2023 FDIC special assessments of $1.65 billion and divestiture-related impacts), which indicates a rise from $51.3 billion in 2022. Though a higher expense base is a near-term headwind, the business restructuring is likely to reduce costs over time.
In fact, management predicts expenses to start reducing in the second half of 2024 and continue into 2026. Though we suggest total operating expenses to rise 8.6% and 2.4% in 2023 and 2024, respectively, the uptrend is expected to reverse in 2025, given the benefits of the transformational strategies.
Image Source: Zacks Investment Research
Solid Progress on Consumer Banking Business Divestiture
Shortly after being appointed to lead the bank, Fraser announced a major strategic action in April 2021. This included exiting the consumer banking business in 13 markets across Asia and the European, Middle Eastern, and African (EMEA) regions.
At that time, the company had been witnessing lower revenues in its then-Asia Global Consumer Banking segment, which affected operating results. Hence, the decision to shut down such businesses was a strategic fit. Since the announcement, the company has made rapid progress on this front, closing sales in nine markets, including Australia, Bahrain, India, Malaysia, the Philippines, Taiwan, Thailand, Vietnam and Indonesia. The wall street biggie is also progressing with its plans to gradually wind down the consumer banking business in South Korea.
In October 2023, Citigroup agreed to sell its China-based onshore consumer wealth portfolio to HSBC Holdings plc (HSBC - Free Report) . The completion of the deal is expected in the first half of 2024. As a result of the sale, C will transfer assets under management and deposits worth approximately $3.6 billion to HSBC. Further, it will retain its institutional businesses where it has a preeminent position. It continues to cater to the needs of ultra-high net worth clients of China.
In September 2022, the bank had announced that it would wind down its UK retail banking business, and expand personal banking and wealth management businesses in the region as the country is a strategic wealth hub for Citigroup’s operations.
In January 2022, the company revealed plans to exit the consumer, small business and middle-market banking operations in Mexico — Banco Nacional de México (“Banamex”) — from its corporate and IB business in the country. It remains on track to separate its business in Mexico by the second half of 2024, followed by an IPO in 2025.
Business Restructuring to Make the Company Agile
Apart from aligning the bank’s operations by shrinking international businesses, another decision taken by Fraser to enhance efficiency involves major organizational restructuring. Management intends to reduce its layers from 13 to eight and lay off thousands of employees.
The existing reportable operating segments will be replaced by five new ones, namely Services, Markets, Banking, Wealth and U.S. Personal Banking. Further, the remaining activities will be clubbed under a separate All Other segment. This would consist of Legacy Franchises and Corporate/Other units.
These new segments will operate across two regions, consisting of North America and an international group. Also, the leaders of each of Citigroup’s five main businesses will report directly to Fraser and be members of the executive management team.
Along with the third-quarter 2023 results announced in October, management provided updates on its organizational overhaul. By then, it had optimized the top two management layers, resulting in a 15% reduction of the functional roles in those layers. It also resulted in the elimination of 60 committees.
Also, in November 2023, Bloomberg reported job cuts involving approximately 10% of C’s senior manager roles, which aggregated to around 300 managers. Management stated that the company would record $1 billion of restructuring and severance costs in the fourth quarter of 2023. Of this, $600 million accrued in the initial three quarters. The company expects to complete its organizational simplification initiative by the end of the first quarter of 2024.
This will help reduce bureaucracy, elevate its five core businesses as well as reduce dual heads and committees within the organization. Such optimization of management layers and reduction in functional roles will drive accountability and make the decision-making process swifter.
What 2024 Beholds for Citigroup?
Per the latest Summary of Economic Projections, the growth rate of the U.S. economy will slow down to 1.4% in 2024. In 2023, the economy is anticipated to grow 2.6%. With the central bank signaling a 75-basis points cut in interest rates in 2024, the company’s net interest income is not expected to improve much.
Given such an economic slowdown, we believe Citigroup’s focus on efficiency initiatives and implementation of transformational strategies, as discussed above, will likely support its results.
The business divestitures are expected to free up capital to facilitate a pivot to other high-quality businesses like international wealth management operations in Singapore, Hong Kong, the UAE and London to stoke revenue growth and generate higher returns for the company. The company anticipates the release of roughly $12 billion (in aggregate) of allocated tangible common equity over time from such market exits.
Though uncertainty prevails as to when the IB business will rebound, deal-making activity is encouraging. Per Bloomberg reports, the company intends to enter the direct lending space by January 2024.
Given the upcoming challenging macroeconomic backdrop, such moves are essential to drive the results of the company. Notably, other players in the banking space, including JPMorgan Chase & Co. (JPM - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , have been looking for prospective partners as they wish to expand their offerings in the lucrative private lending business.
Notably, JPM has been looking for third-party capital to supplement the more than $10 billion it has already allocated for its private credit strategy. Similarly, CFG has been undertaking discussions with potential sponsors.
Parting Thoughts
The strategies discussed above provide an illustrative roadmap to the company achieving its medium-term target of return on average tangible common shareholders equity of 11-12%. This reflects that the management expects improvement in the company’s performance.
Moreover, the company’s effort to focus on revenue growth and reduce expenses over the long term will positively impact its earnings growth and likely revive shareholders' confidence in the stock.
Image: Shutterstock
Will Citigroup's (C) Business Transformation Moves Aid in 2024?
Citigroup Inc.’s (C - Free Report) shares have rallied 17.6% so far this year, outperforming the industry’s rise of 14%. This marks a turnaround from the dismal 2022 performance, wherein the stock lost 22.1%.
Chief executive officer Jane Fraser’s strategic initiatives, including business divestitures and a major organizational overhaul at Citigroup to boost the company’s performance, have likely driven the recovery in the bank’s stock price.
Also, management’s projections for the fourth quarter and full-year 2023 indicate encouraging performance.
The decent momentum in deal-making, particularly observed in the debt capital markets in third-quarter 2023, is likely to continue in the fourth quarter. In fact, the company expects investment banking (IB) revenues to rise in the high-single-digit range sequentially in the quarter ending December.
However, given the muted client activity across a broad set of asset classes during the quarter, market revenues for the fourth quarter are anticipated to decline 15-20% on a sequential basis.
The company expects revenues for the full year (excluding 2023 divestiture-related impacts) to be at the lower end of the $78-$79 billion band. The outlook indicates a rise from $75.3 billion recorded in 2022.
The Zacks Consensus Estimate for Citigroup’s 2023 revenues is pegged at $79 billion, indicating a year-over-year increase of 4.8%. We estimate the metric to rise 6% in the current year.
Management anticipates expenses to be approximately $54 billion in 2023 (excluding 2023 FDIC special assessments of $1.65 billion and divestiture-related impacts), which indicates a rise from $51.3 billion in 2022. Though a higher expense base is a near-term headwind, the business restructuring is likely to reduce costs over time.
In fact, management predicts expenses to start reducing in the second half of 2024 and continue into 2026. Though we suggest total operating expenses to rise 8.6% and 2.4% in 2023 and 2024, respectively, the uptrend is expected to reverse in 2025, given the benefits of the transformational strategies.
Image Source: Zacks Investment Research
Solid Progress on Consumer Banking Business Divestiture
Shortly after being appointed to lead the bank, Fraser announced a major strategic action in April 2021. This included exiting the consumer banking business in 13 markets across Asia and the European, Middle Eastern, and African (EMEA) regions.
At that time, the company had been witnessing lower revenues in its then-Asia Global Consumer Banking segment, which affected operating results. Hence, the decision to shut down such businesses was a strategic fit. Since the announcement, the company has made rapid progress on this front, closing sales in nine markets, including Australia, Bahrain, India, Malaysia, the Philippines, Taiwan, Thailand, Vietnam and Indonesia. The wall street biggie is also progressing with its plans to gradually wind down the consumer banking business in South Korea.
In October 2023, Citigroup agreed to sell its China-based onshore consumer wealth portfolio to HSBC Holdings plc (HSBC - Free Report) . The completion of the deal is expected in the first half of 2024. As a result of the sale, C will transfer assets under management and deposits worth approximately $3.6 billion to HSBC. Further, it will retain its institutional businesses where it has a preeminent position. It continues to cater to the needs of ultra-high net worth clients of China.
In September 2022, the bank had announced that it would wind down its UK retail banking business, and expand personal banking and wealth management businesses in the region as the country is a strategic wealth hub for Citigroup’s operations.
In January 2022, the company revealed plans to exit the consumer, small business and middle-market banking operations in Mexico — Banco Nacional de México (“Banamex”) — from its corporate and IB business in the country. It remains on track to separate its business in Mexico by the second half of 2024, followed by an IPO in 2025.
Business Restructuring to Make the Company Agile
Apart from aligning the bank’s operations by shrinking international businesses, another decision taken by Fraser to enhance efficiency involves major organizational restructuring. Management intends to reduce its layers from 13 to eight and lay off thousands of employees.
The existing reportable operating segments will be replaced by five new ones, namely Services, Markets, Banking, Wealth and U.S. Personal Banking. Further, the remaining activities will be clubbed under a separate All Other segment. This would consist of Legacy Franchises and Corporate/Other units.
These new segments will operate across two regions, consisting of North America and an international group. Also, the leaders of each of Citigroup’s five main businesses will report directly to Fraser and be members of the executive management team.
Along with the third-quarter 2023 results announced in October, management provided updates on its organizational overhaul. By then, it had optimized the top two management layers, resulting in a 15% reduction of the functional roles in those layers. It also resulted in the elimination of 60 committees.
Also, in November 2023, Bloomberg reported job cuts involving approximately 10% of C’s senior manager roles, which aggregated to around 300 managers. Management stated that the company would record $1 billion of restructuring and severance costs in the fourth quarter of 2023. Of this, $600 million accrued in the initial three quarters. The company expects to complete its organizational simplification initiative by the end of the first quarter of 2024.
This will help reduce bureaucracy, elevate its five core businesses as well as reduce dual heads and committees within the organization. Such optimization of management layers and reduction in functional roles will drive accountability and make the decision-making process swifter.
What 2024 Beholds for Citigroup?
Per the latest Summary of Economic Projections, the growth rate of the U.S. economy will slow down to 1.4% in 2024. In 2023, the economy is anticipated to grow 2.6%. With the central bank signaling a 75-basis points cut in interest rates in 2024, the company’s net interest income is not expected to improve much.
Given such an economic slowdown, we believe Citigroup’s focus on efficiency initiatives and implementation of transformational strategies, as discussed above, will likely support its results.
The business divestitures are expected to free up capital to facilitate a pivot to other high-quality businesses like international wealth management operations in Singapore, Hong Kong, the UAE and London to stoke revenue growth and generate higher returns for the company. The company anticipates the release of roughly $12 billion (in aggregate) of allocated tangible common equity over time from such market exits.
Though uncertainty prevails as to when the IB business will rebound, deal-making activity is encouraging. Per Bloomberg reports, the company intends to enter the direct lending space by January 2024.
Given the upcoming challenging macroeconomic backdrop, such moves are essential to drive the results of the company. Notably, other players in the banking space, including JPMorgan Chase & Co. (JPM - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , have been looking for prospective partners as they wish to expand their offerings in the lucrative private lending business.
Notably, JPM has been looking for third-party capital to supplement the more than $10 billion it has already allocated for its private credit strategy. Similarly, CFG has been undertaking discussions with potential sponsors.
Parting Thoughts
The strategies discussed above provide an illustrative roadmap to the company achieving its medium-term target of return on average tangible common shareholders equity of 11-12%. This reflects that the management expects improvement in the company’s performance.
Moreover, the company’s effort to focus on revenue growth and reduce expenses over the long term will positively impact its earnings growth and likely revive shareholders' confidence in the stock.
Citigroup carries a Zacks Rank #3 (Hold) currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.