Citi’s Consumer Banking Margins Get Squeezed as Economy Slows

The European debt crisis, credit market volatility and sluggish U.S. economic growth are impacting revenues and profit margins of most banks. Moody’s recently downgraded the debt rating of three leading U.S. banks – Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). Citigroup recently announced that it’ll cut back on hiring across its trading, investment banking and consumer banking divisions worldwide due to the economic slowdown which is affecting its revenues and profits, ^[1] while its expenses are increasing at the same time. We believe the above factors can have a severe impact on Citi’s profit margins in the short term.

For the longer term, we estimate that Citigroup’s consumer banking operating margin will increase from near 15% in 2012 to 31% by the end of our forecast period led by aggressive retail banking expansion particularly in emerging markets. Trefis members however expect a more modest increase from 6.7% to 10.3% during the same period, implying a downside of 20% to the Trefis price estimate for Citigroup’s stock.

Citi Revenues Slump Due to Macro Headwinds…

Citigroup’s revenues for the first half of 2011 declined 15% $40.3 billion compared to same period last year while its profits dropped 11% to $6.34 billion due to the slow U.S. economic growth and credit crisis hurting European nations. ^[1] The bank’s expenses have increased 8% to $25.3 billion in the first half of 2011 due to several factors like foreign exchange translation, volume-related expenses in Citicorp, legal and related expenses and the bank’s ongoing investment spending.

In addition, Moody’s has recently downgraded short-term debt ratings for Bank of America and Citigroup by a notch, from Prime-1 to Prime-2 while it cut Wells Fargo’s long-term senior debt rating from A2 to A1, reflecting the growing unwillingness of the U.S. government to bail out large banks in trouble. (See Moody’s Sizes up Gov’t Support in Downgrades: BofA, Wells Fargo & Citi Slump)

… Cuts Hiring to Control Costs

Taking stock of its slowing revenues and to keep check on its growing expenses, Citi has decided to limit hiring for all its divisions worldwide. ^[1]

The bank is however recruiting only in businesses and regions targeted for growth such as emerging markets like China. This is because the company is performing better internationally than in North America. Last quarter, Citi’s international consumer banking revenues increased 12% y-o-y to $4.8 billion while its North American consumer banking revenues declined 9% to $3.4 billion. ^[2]

We currently have a Trefis price estimate of $48 for Citigroup’s stock, which is well above the current market price and predicated on a recovery in business conditions in the coming years. If current macro headwinds persist or if the economy slumps into another recession, we will need to update our estimates.

Our complete analysis for Citigroup’s stock is here.

1. Citigroup cuts back on hiring as revenue slows, Crainsnewyork, Sept 15, 2011 [↩] [↩] [↩]
2. Citigroup Reports Second Quarter 2011 Results, Press Release, July 15, 2011 [↩]