Investment Thesis

The five reportable segments of Citi are - Services (Treasury Trade Solutions and Securities Services), Markets (Fixed Income and Equity Markets), Banking (Investment Banking and Corporate Lending), Wealth (Private Bank, Wealth at Work and Citigold) and U.S. Personal Banking (Branded Cards, Retail Services and Retail Banking). And the All-Other segment comprises Legacy Franchises and Corporate/Other units. In December 2024, Citigroup completed its separation from the institutional banking business in Mexico from its consumer, small and middle market businesses. With this, Citigroup will now operate two separate financial groups in Mexico: Grupo Financiero Citi Mexico and Grupo Financiero Banamex. In June 2024, Citigroup sold its China-based onshore consumer wealth portfolio to HSBC China a wholly-owned subsidiary of HSBC Holdings plc. In 2023, Citigroup completed the sale and migration of its Taiwan consumer business to DBS as well as closed the sale of its consumer banking franchises in India and Vietnam. In 2022, the company sold its consumer banking businesses in Malaysia, Thailand, Bahrain, Australia and the Philippines. It also sold its Puerto Rico-based broker-dealer, Citi International Financial Services, LLC, and investment advisory firm, Citi Asesores de Inversion Uruguay S.A., to Insigneo. As of Dec. 31, 2024, Citigroup had $2.36 trillion in assets, $694.5 billion in loans, $1.28 trillion in deposits and $208.6 billion in common shareholders' equity.

• Warning! GuruFocus has detected 3 Warning Sign with C.

Investment Upsides:

Citigroup announced an organizational realignment to simplify its governance structure by eliminating various management layers. Pursuant to this, the company made changes to its operating model in the fourth quarter of 2023. The new organizational structure replaced the existing reportable segment with five new reportable operating segments. Also, the leaders of each of Citigroup's five main businesses will report directly to the CEO. These new segments operate across two regions, consisting of North America and an international group. The restructuring resulted in a streamlined and straightforward management structure aligned with and supporting the bank's strategy. The reorganization trimmed management layers and now operates under eight layers rather than 13. With fewer layers, increased spans of control and significantly reduced bureaucracy and unnecessary complexity, the company will now be able to operate more efficiently. In January 2024, the bank announced plans to cut 20,000 jobs, approximately 8% of its global staff by 2026. By the end of 2024, the bank had already made significant progress, reducing its headcount by 10,000 employees. Such optimization of management layers and reduction in functional roles, along with the bank's consumer banking divesture efforts, will further drive $2-2.5 billion of annualized run rate savings by 2026.

Citigroup has been emphasizing growth in core businesses through streamlining operations internationally. In line with this, in April 2021 Citigroup announced plan to exit consumer banking operations in 14 markets across Asia and the EMEA. Citigroup has successfully withdrawn from consumer banking businesses in nine countries. The wind-down of the company's consumer banking businesses in Korea and overall presence in Russia are in progress. In December 2024, Citigroup completed its separation from the institutional banking business in Mexico from its consumer, small and middle market businesses. With this, Citigroup will now operate two separate financial groups in Mexico, Grupo Financiero Citi Mexico and Grupo Financiero Banamex. Citigroup is preparing for a planned IPO of its consumer, small business, and middle market banking operations in Mexico and has restarted the sales process for the consumer banking business in Poland. In the third quarter 2024, JTC announced an agreement to acquire Citigroup's global fiduciary and trust administration services business, Citi Trust.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 fee income growth. In June 2024, Citigroup sold its China-based onshore consumer wealth portfolio to HSBC China - a wholly owned subsidiary of HSBC Holdings plc. The bank winded down its UK retail banking business and expanded personal banking and wealth management businesses in the region.

A rise in NII has been supporting Citigroup's top-line growth over the years. The metric witnessed a CAGR of 8.4% from 2021 to 2024. NII is expected to improve further following the Federal Reserve's 2024 rate cut, which stabilized funding costs. Anticipated additional rate cuts in 2025 are likely to further bolster the metric's growth in the near-term. As of Dec. 31, 2024, the company's liquidity resources were $933 billion, while its total debt (short-term and long-term borrowing) was $335.8 billion. Moreover, the company's senior debt enjoyed investment-grade credit ratings of BBB+, A and A3 from Standard & Poor's, Fitch and Moody's, respectively. This will likely enable it to access the debt market at favorable rates. Hence, given the strong liquidity position, its debt seems manageable.

Citigroup's focus on maintaining a strong capital base will support its capital distribution activities. As of Dec. 31, 2024, the common equity tier (CET) 1 capital ratio was 13.6%. In July 2024, the company hiked its quarterly dividend by 6% to 56 cents per share. In the fourth quarter of 2024, the company repurchased $1 billion of its common stock. On Jan. 13, 2025, Citigroup's board of directors approved a $20 billion common stock repurchase program with no expiration date. The bank aims to repurchase $1.5 billion of its common stock in the first quarter of 2025. Supported by a strong capital and liquidity position, capital distribution activities seem sustainable. Such moves will likely enhance shareholders' value and stoke investors' confidence in the stock. Citigroup is accelerating its digital transformation to enhance efficiency and client services. In December 2024, it launched the Citi Integrated Digital Assets Platform (CIDAP), utilizing blockchain to develop secure digital asset solutions. The bank also introduced AI tools like Citi Assist and Citi Stylus for 140,000 employees, streamlining internal processes. Citigroup is collaborating with Google Cloud to modernize its infrastructure and improve customer experiences. Additionally, in November 2024, it made a minority investment in Pylon to automate mortgage origination and provide interim funding. These initiatives reflect Citigroup's commitment to digital innovation and strategic partnerships.

Valuation

Investment Risks

Owing to transformation expenses and business-led investments, operating expenses recorded a five-year (ended 2024) CAGR of 4.4%. Although Citigroup is focused on lowering expenses through organizational simplification, cost reductions, and productivity savings, the bank's increased investments in business transformation efforts, technological advancements and higher volume-related expenses are likely to keep the expense base elevated in the near term. Citigroup's challenge in improving fee income is a concern. Non-interest income witnessed a negative CAGR of 3.4% from 2020 to 2024. Any volatility in global investment banking activity, along with lower market valuations on assets under custody and administration, is likely to negatively impact its fee income. Citigroup's trailing 12-month return on equity (ROE) undercuts its growth potential. The company's ROE of 6.62% compares unfavorably with 16.99% of the S&P 500. This reflects that the company is less efficient in using shareholders' funds.

Guru Activity

The sudden huge sell of Citigroup's shares by Gurus past quarter goes in tandem with Citi's underwhelming 2024 Q4 performance, where the bank saw its revenue fall by 4.8% from the prior quarter. It seems like Gurus have put an end to their patience on Citi's stock after the company's revenue declined by 1.36% CAGR from 2021 to 2024 and want to swap Citi's position with other formidable banking stocks like Morgan Stanley and JP Morgan.

Recommendation

Shares of Citigroup have outperformed the industry over the past six months. The Wall Street Consensus Estimate for 2025 has been revised upward over the past 60 days. Thus, given the strong fundamentals and positive estimate revisions, the company has decent upside potential in the near term. Citigroup's stock closed on 17th March 2025 at $69.94 and hinging on the fundamentals of the bank, I see a narrow upside of $3 and hence a target price of $73.