Does Citigroup’s (C) medium-term business plan have merit?


Following Wednesday’s investor conference, CitigroupC shares of slid 3.3% during yesterday’s trading hours. Although the company’s short-term financial targets likely disappointed investors, CEO Jane Fraser noted that it would take “a few years” to hit her return targets, and she remained confident the bank would see growth. revenue “as soon as possible,” according to a CNBC article.

Citigroup management unveiled a detailed overview of its new financial reporting structure, effective in the first quarter of 2022, which was previously discussed in its fourth quarter 2021 earnings release. The change is intended to better align the business with its renewed strategy and to simplify its organization. Specifically, the company is cutting its Global Consumer Banking segment as part of efforts to exit banking in international markets.

The new reporting structure differentiates five main businesses – Services, Markets and Banking, which are grouped under the Institutional Clients Group segment, and US Personal Banking and Global Wealth Management under the Personal Banking and Wealth Management segment. The five companies will improve the company’s earnings mix. A third segment, Legacy Franchises, will house businesses being divested (Asian consumers and Mexican businesses) and holding assets inherited from the company.

Favorable interest rates and the recovery in the consumer lending environment should be the main revenue drivers in the short to medium term. At the same time, the company’s continued business-focused investments will drive medium to long-term growth.

Macroeconomic factors aside, the company intends to intensify its transformation efforts and continue investing in front office expansion and modernization in the near term. In addition, mix shifts towards higher return businesses, including services and wealth management, and transformation efficiencies beginning to bear fruit will pave the way for achievement of the mid-term RoTCE target. from 11 to 12%.

Additionally, the company has made progress in reducing its legacy assets and exits from consumer banking businesses. Of the 14 market exits announced, it has found buyers for seven franchises and plans to phase out its consumer banking business in South Korea.

These exits will free up capital and help the company continue to invest in wealth management operations in Singapore, Hong Kong, the United Arab Emirates and London to drive growth. Notably, Citigroup expects to release $12 billion (total) of allocated tangible common stock over time from these market exits.

While spending is expected to increase in the short term, the bank is looking at the same to normalize in the medium term, targeting an efficiency ratio (excluding Asian sales impacts) below 60%, which compares favorably to 65% observed in 2021. .

Therefore, shifting capital allocation to higher-returning firms and gradually lowering spending will support C growth in the medium term. Additionally, the company appears to be implementing sweeping changes and appropriate long-term measures rather than just short-term tactical fixes to achieve short-term financial goals. This should be rewarding for patient investors.

However, in the short term, slow transformation efforts and increased spending could dampen investor interest in the stock.

The bank’s shares have lost 19% over the past six months, underperforming the sector’s 0.6% decline.

Image source: Zacks Investment Research

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

Actions to consider

A few top-ranked companies in finance are Morgan Stanley MS and First business financial services FBIZ. Morgan Stanley currently carries a Zacks Rank #2 (Buy), while FBIZ sports a Zacks Rank #1.

The Zacks consensus estimate for Morgan Stanley’s earnings for the current year has been revised up 4.2% in the past 60 days. Shares of MS are up 7% over the past year.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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