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Streamlining Efforts & NII Aid Citigroup (C) Amid Cost Woes

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Citigroup Inc. (C - Free Report) is making swift progress to exit its consumer banking business in the international markets. Its efforts to realign the organization by eliminating various management layers will enhance efficiency, while high interest rates will support net interest income (NII).Yet, increasing operating expenses due to investments and transformations are likely to limit Citigroup’s bottom-line growth in the upcoming period. The fee income volatility remains a major headwind.

As part of its intention to exit consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico, the Wall Street biggie has now closed sales in nine markets — Australia, Bahrain, India, Malaysia, the Philippines, Taiwan, Thailand, Vietnam and Indonesia.

Sales aside, the company is on track to wind down its consumer businesses in China and Korea, along with reducing its overall presence in Russia. It has restarted the exit process for the consumer banking business in Poland.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.

This September, Citigroup announced an organizational realignment to simplify its governance structure and eliminate various management layers. The new organizational structure will replace the existing two reportable segments with five new reportable operating segments, namely Services, Markets, Banking, Wealth and U.S. Personal Banking. Such a reduction in functional roles will drive accountability and make the decision-making process swifter.

With the Federal Reserve expected to keep interest rates relatively high in the near term, Citigroup’s NII is expected to remain high. However, any increase in funding costs, majorly due to investors moving toward higher-yielding assets, is likely to weigh on NII growth. Management expects NII (excluding Markets) to be slightly above $47.5 billion in 2023. We project NII to rise 12.3% in the current year.

As of Sep 30, 2023, the company had cash and due from banks, as well as deposits with banks and net allowance, totaling $253.98 billion. This is sufficient to meet its short-term borrowings of $43.17 billion as of the same date.

Decent liquidity and a strong capital base will support the company’s capital distribution activities. In the first nine months of 2023, it repurchased shares worth $1.5 billion. Management expects buybacks to be modest in the fourth quarter of 2023. 

However, owing to transformation expenses and business-led investments, operating expenses flared up, witnessing a four-year (ended 2022) CAGR of 5.2%. The rising trend continued in the first nine months of 2023. Also, increased spending, specifically on severance costs related to its organizational overhaul and divestiture expenses, is likely to inflate expenses and hamper bottom-line growth in the upcoming period. We forecast expenses to grow 8.6% in 2023.

Citigroup has been facing challenges in improving fee income. Non-interest income declined in the first nine months of 2023, and the same recorded a decline, seeing a CAGR of 0.3% from 2019 to 2022. Given the decline in global investment banking activity and lower market valuations on assets under custody and administration, these are likely to affect the metric. We expect fee income to decrease 5.4% to $25.22 billion in 2023.

C’s shares have gained 9.1% in the past three months compared with the industry’s rise of 4.7%.


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The company currently has 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 stocks from the banking space are First Citizens BancShares, Inc. (FCNCA - Free Report) and Bank OZK (OZK - Free Report) .

First Citizens BancShares currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been revised 3.7% upward over the past 30 days. In the past six months, FCNCA shares have improved 12%.

Earnings estimates for OZK have been revised marginally upward for 2023 over the past 30 days. Shares of OZK have rallied 16.8% in the past six months. OZK currently carries a Zacks Rank #2.

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