Monday, April 14, 2014

Citigroup Logs Higher Profit, Beats Estimates- 04/18/2014


  1. Sources: Bloomberg, Company 10k, Earnings report, Seeking alpha, MD&A

    Business overview
    Citigroup is a global financial services company with operation in more than 160 countries and jurisdictions. Citicorp, the company's core business, consists of two divisions: the global consumer banking segment, which provides basic personal banking to customers; the institutional clients group, which provides financial institutions and commercial clients with investment banking, cash management, and various other products and services. Citi Holdings include noncore businesses and questionable assets.
    (reference items: 2013 rev 72 billion, OI 19.5 billion, FCF 53.9 billion)
    By region
    NA 44%, Asia 21%, LATAM 16%, EMEA 16%

    By business (% of rev, % of operating income)
    Global consumer banking 50%, 50%
    Securities and Banking 30%, 43.1%
    Citi transaction services 14%, 21%
    Citi holdings 6%, -14%

    (Used BI pre-built comps)
    Net interest margin 2.8%, compare with industry median of 1.5%
    ROE 6.9%, compare with industry median of 7.3%
    Efficiency ratio 64%, lower than industrial median of 70%
    Tier 1 and other capital ratios are in line with industry medians.

    What is going right
    - Revenue increased 10% in 2013, operating expenses decreased 3%.
    - Citigroup's has a narrow moat due to its massive scale in consumer lending and the global reach of its institutional clients. Global operating scale provide Citi some advantage in cutting costs. Though consumer lending is essentially a commodity business, few competitors can spread the has a scale so large. It was evident that Citi reduced 10,000 head counts in employees and achieved better results.
    - Citi has a strong presence in the emerging markets, growth in those markets will help to offset the sluggish loan demands in the US and Europe.
    - Quality of loan improved, loan loss allowances plummeted from 3.7% to 2.9%. Citi's margins widened due to decreased credit losses. Citi enhanced its ability at accessing credit risk, and management is tightening its risk controls.
    - New management recapitalized and refocused Citi's operations. Tier 1 capital, common capital 13.7%, 12.6%. Ratio was down from 2012 but 1.5% higher than in 2010, suggesting stronger financial position. Along with falling expenses and a more rigid regulatory environment creates an ideal condition for a business turnaround.

    What could go wrong
    - Citi's presence in emerging markets is the company's biggest advantage but also the source of the most risk. Rapid credit growth can be highly profitable on the way up, but it is subject to macro environments. Some of the emerging markets are already showing declining growth and worsened credit ratings.
    - Citi holdings segment's performance improved considerably over the last few years, with shrinking assets. It caused -14% loss to Citi and will be a drag on earnings for the near future. A secondary source of risk is the company's investment bank, a business that we consider to be a perennial source of disappointment for investors.

    Relative valuation
    Chose WFG, JPM, HSBC, and BOA as Comps
    P/B .7, V.S. comps median of 1.1
    PEG .36 V.S comps median of .28

    Citi delivered better than estimate results, and it is currently trading at low multiples. Nevertheless, investors are cautious with financial services companies and often bearish. I recommend to add Citi to watch list and wait until there is a margin of safety to conclude buy.

  2. Sources:
    - 2013 10K
    - Seeking alpha
    - Zacks

    Business Overview: Citigroup Inc. (C) is a globally diversified financial services holding company providing a range of financial products and services

    It has two primary business segments Citicorp & Citi Holdings: (% of total revenue in FY 2013; % of operating income in FY 2013)
    - Citicorp, consisting of
    • Global Consumer Banking businesses (50%; 50%)
    • Institutional Clients Group (44%; 64%)
    - Citi Holdings, consisting of businesses and portfolios of assets that Citigroup has determined are not central to its core Citicorp businesses (6%;-14%)

    Revenue by geography: North America 44%; Asia 21%; Latin America19%; Europe, Middle East and Africa 16%

    Core Businesses:
    - Largest segment Global Consumer Banking businesses
    • consists of Citigroup’s four geographical Regional Consumer Banking
    • Cards -28% of total revenue; Retail Banking- 22% of total revenue
    • As of December 31, 2013, Citi had consumer banking operations in 81% of the world’s top 150 cities
    - Most Profitable business Institutional Clients Group:
    • Securities and Banking (30% of rev;43% of operating income)
    o includes investment banking and advisory services, corporate lending, fixed income and equity sales and trading, prime brokerage, derivative services, equity and fixed income research and private banking
    o S&B revenue is generated primarily from fees and spreads associated with these activities
    • Transaction Services(14% of rev; 21% of operating income)

    Customers: major international corporations to small and medium-sized enterprises, from government agencies to individual consumers

    Competitors for the major business units:
    -Citigroup’s competitors include a variety of other financial services and advisory companies
    - Major competitors: JPMORGAN CHASE & CO, BARCLAYS PLC, HSBC, BoA

    Financial Overview:
    - FCF analysis not necessary for banking industry
    - Profitability:
    • ROA: 0.73; JPM 0.75; BoA 0.53
    • Net Interest Margin: 2.85%; JPM: 2.23%; BoA 2.47%;BARC 1.76%; industry Avg. 2.06%
    - Efficiency Ratio: 64%; JPM 61%;BoA 70%; BARC 78%; Industry Avg. 72%

    What is going right?
    - Citi reported a 2% decline in earnings but a 4% increase in net income for its Q1 2014, representing higher margin
    - Citi reported loan loss allowances as 2.87% of loans compared to 3.7% from year-ago quarter. This means that Citi is doing a much better job of assessing credit risk when extending loans to its customers and this, in turn, is helping margins expand due to decreased credit losses.
    - Growing deposit balances. Citi is focused on acquiring the industry's best deposit franchise and its total deposits reflected a 5-year CAGR of 2.98% in 2013
    - Citigroup's preferable capital plan indicating a desire to pay a dividend of $0.20 per share and to return $6.50 billion through a capital repurchase program. Although not approved by FRB, showing management's intention to increase return to shareholders

    What can go wrong?
    - Revenue:
    • the low interest rate environment may affect its spread and the net interest margin is expected to remain flat in 2014 according to MD&A
    • the shrinking of the Citi Holdings portfolio, including joint ventures, dispositions and asset runoffs would result in revenue challenges
    - Expenses:
    • Internal risk control issues, including fraud risk controls: there has been the announced fraud that took place in its Mexican unit.

  3. Source: Bloomberg, seeking alpha and company 10k
    CITI has two big segment
    Citicorp 83.4%, 121%
    -Global consumer banking (retail banking, local commercial banking, citi branded cards and citi retail service): 50% of total revenue, 52% of total net income
    -Securities and banking: 30% of revenue, 49% of net income,
    -Transaction service: 14% of revenue, 21% of net income

    Citi holdings: 16.6%, -21.1% (commercial loans)

    U.S 44%, Asia Pacific: 21%, Latin America: 19%, Europe, Middle East and Africa: 16%

    Growth rate: rev: 3.12%, net income: 75.86%
    Citicorp Revenue increased 3%, net income increased 11%
    Citi holding Revenue increased from negative 800M to positive 4.5B, net loss declined 70%
    Securities and banking : net income increased 43%

    6.88% in 2013, 4.13% in 2012, 6.48% in 2011
    Industry: 7.98%, JPM: 7.61%, Bof A: 4.61%, HSBC: 8.89%
    0.73% in 2013, 0.40% in 2012, 0.58% in 2011.

    Efficiency ratio
    Industry avg: 71.96%, Citi: 64.41%, JPM: 60.86%, Bof A: 69.99%, Hsbc: 61.16%

    Avg: 1.41%, Citi: 2.77%, JPM: 2.08%, BofA: 2.53%, HSBC: 1.68%

    Net income margin: 14.77% in 2013, 8.40% in 2012, 10.79% in 2011

    Total deposit: the same with 2012 (966 in 2013, 968 in 2012 decresed)
    Total loans: declined 4% (664 in 2013, 691 in 2012)

    Individuals and institutions who need deposit, loans and other financial service
    What going right:
    Citi’s total provisions for credit losses and for benefits and claims of
$8.5 billion declined 25% from the prior year. Net credit losses of $10.5 billion were down 26% from 2012. Consumer net credit losses declined 27% to
$10.3 billion, reflecting improvements in the North America mortgage portfolio within Citi Holdings.
    Corporate net credit losses decreased 10% year-over-year to $201 million, driven primarily by continued credit improvement in Securities and Banking in Citicorp.
    What could go wrong:
    Revenue: global consumer banking revenue declined 2% in 2013,
    Expense: incurred legal and related costs of $3.0 billion in 2013, compared
to $2.8 billion in the 2012.
    Citicorp’s expenses were $42.5 billion, down 5% from the prior year, while Citi Holdings expenses increased 13% year-over-year to $5.9 billion, primarily due to higher legal and related expenses
    Capital plan was rejected by Fed, deny citi’s plan to pay dividends and repurchase shares.