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Is There Merit in Citigroup's (C) Medium-Term Business Plan?

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Following the investor conference on Wednesday, Citigroup’s (C - Free Report) shares slid 3.3% in yesterday’s trading hours. While the company’s financial targets for the near term have likely underwhelmed investors, CEO Jane Fraser noted that it would “take a few years” to achieve her return targets, and she remained confident that the bank will see revenue growth “sooner rather than later,” per a CNBC article.    

Citigroup’s management unveiled a detailed outline of its new financial reporting structure, effective first-quarter 2022, which was previously hinted at in its fourth-quarter 2021 earnings release. The change is designed to better align the company with its refreshed strategy and simplify its organization. Specifically, the company is removing its Global Consumer Banking segment amid efforts to exit the banking business in international markets.

The new reporting structure differentiates five core businesses — Services, Markets and Banking, which are grouped under the Institutional Client Group segment, and U.S. Personal Banking and Global Wealth Management under the Personal Banking and Wealth Management segment. The five businesses will improve the company’s earnings mix.  A third segment, Legacy Franchises, will house businesses being exited (Asia consumer and Mexico businesses) and the company legacy holding assets.

Favorable interest rates and recovery in the consumer lending backdrop are likely to be key revenue drivers in the near to medium term. At the same time, the company’s ongoing business-led investments will drive medium to longer-term growth.

Macro factors aside, the company intends to ramp up its transformation efforts, and continue investments in front-office expansions and modernization in the near term. Also, mix shifts toward higher-returning businesses, including Services and Wealth, and transformation efficiencies beginning to bear fruits will carve the path to realize medium-term RoTCE goal of 11-12%.

Also, the company has been making advancements in the rundown of its legacy assets and consumer banking business exits.  Of the announced 14 market exits, it has found buyers for seven franchises and plans to gradually wind down its consumer banking business in South Korea.

Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth. Notably, Citigroup anticipates the release of $12 billion (in aggregate) of allocated tangible common equity over time from such market exits.

While expenses are projected to increase in the near term, the bank sees the same to normalize over the medium term, targeting an efficiency ratio (excluding the impacts of Asia sales) of less than 60%, which compares favorably with 65% witnessed in 2021.

Hence, capital allocation shift to higher-returning businesses and a gradual decline in expenses will foster growth for C in the medium term. Also, the company appears to implement sweeping changes and appropriate long-term measures than making do with short-term tactical fixes to satisfy near-term financial targets. This should be rewarding for patient investors.

However, in the near term, its slow pace at transformation efforts and higher expenses might dampen investor interest in the stock.

Shares of the bank lost 19% over the last six months, underperforming the 0.6% decline for the industry.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

C currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

A couple of better-ranked companies from the finance space are Morgan Stanley (MS - Free Report) and First Business Financial Services (FBIZ - Free Report) . Morgan Stanley currently carries a Zacks Rank #2 (Buy), while FBIZ sports a Zacks Rank #1.

The Zacks Consensus Estimate for Morgan Stanley’s current-year earnings has been revised 4.2% upward over the past 60 days. MS’s shares have risen 7% in the past year.

First Business recorded an upward earnings estimate revision of 9% for 2022 over the past 60 days. The FBIZ stock has jumped 41.3% in the past year.


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