Citigroup Follows Strong Q3 Results With Plans To Exit Retail Banking In 11 Countries

Citigroup (NYSE:C) reported a better-than-expected performance for the third quarter of the year on Tuesday, October 14, thanks to a notable improvement in net interest margins, low provision costs and an increase in debt and equity trading revenues. ^[1] While Citigroup’s global consumer banking and institutional clients divisions carried the results for the quarter by churning out strong profits, the quarter saw the bank’s for-sale units housed under Citi Holdings report a quarterly profit for the first time since the non-core division was formed in the wake of the economic downturn of 2008.

Revenues for the globally diversified banking group grew almost 10% compared to the same period last year and 3% sequentially (after adjusting for accounting charges related to the bank’s own debt). Coupled with provision figures that remained at $1.7 billion for a second consecutive quarter, the lowest since Q1 2006, this helped pre-tax income jump nearly 28% year-on-year. Already one of the best capitalized big banks in the country (see How Do The Largest U.S. Banks Fare In Terms Of Basel III Compliance?), Citigroup strengthened its Basel III Core Tier 1 Capital Ratio another 30 basis points this quarter to bring the figure to 10.7%. Moreover, the bank detailed plans to exit its retail banking operations in 11 countries which were not very profitable. All these factors helped the bank’s shares gain 3% over trading on Tuesday.

We maintain our $58 price estimate for Citigroup’s stock. This figure is roughly 15% ahead of the current market price.

See our full analysis for Citigroup

Consumer Banking Business Streamlining Structure

As we have pointed out in the past, Citigroup’s biggest strength is its extensive global presence. That, combined with the fact that Citigroup is a leader in financial services ranging from traditional loan-deposit offerings to investment banking services, allows the bank to benefit from diversified revenue streams that are not subject to the restrictions faced by its peers that are largely focused on U.S. markets.

Citigroup’s strong retail banking presence across the globe and in emerging markets gives it access to cheap funds in the form of low interest rate deposits from the regions in which it operates, allowing it to achieve better net interest margins. As the bank caters to the demand for loans globally, its interest income is not overly dependent on the interest rate environment prevalent in any single country. The table below summarizes Citigroup’s reported net interest margin (NIM) figures for each of the last fifteen quarters:

As seen in these figures, Citigroup’s NIM figure has hovered around 2.9% over the last three years – in stark contrast to the marked declines witnessed by competitors such as Wells Fargo and JPMorgan for the same period.

At the same time, the bank’s efforts to cut down on operating costs have improved the division’s overall profitability. Citigroup reported an efficiency ratio (defined by the bank as the ratio of total operating expenses to total revenues) of 54.8% for the consumer banking division in Q3 2014 – the best performance in these terms since Q2 2013. The bank’s decision to get rid of its retail banking units in Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary, Japan, Nicaragua, Panama and Peru, as well as its consumer finance business in Korea will only help profit margins over coming quarters. These operations contribute less than 5% of its total consumer banking revenues when taken together, and are not very profitable.

Debt and Equity Trading Desks Deliver Results

The importance of Citigroup’s trading operations to its business model is evidenced by the fact that they contribute roughly 20-25% of the bank’s total revenues, and as much as 40% of total earnings in any given period. This is why Sales and Trading figures as the most valuable business segment in our analysis for the bank, making up almost 33% of its total share value.

Citigroup reports its trading revenues as a part of its Institutional Clients Group division, which also houses its advisory, underwriting, private banking, treasury as well as security services units. The bank raked in $3.7 billion in trading revenues in Q3 2014, with the debt trading desk being responsible for more than 80% of this figure. This is a 2% improvement quarter-on-quarter and an almost 7% jump year-on-year. Notably, equity trading revenues grew at a much faster pace than debt trading revenues – increasing 14% compared to the previous quarter and 16% compared to the same period last year.

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1. Citigroup Reports Third Quarter 2014 Earnings per Share of $1.07, Citigroup Press Releases, Oct 14 2014 [↩]