Citi makes progress on expenses as it waits for revenues to rise

Christopher Dilts/Bloomberg

Citigroup's annual expenses have ticked upward every year since 2019, much to the dismay of investors. This year, however, the global bank is positioned to spend less than it did in 2023.

Expenses are forecasted to decline in the second quarter and then to decrease sequentially for the rest of the year, Chief Financial Officer Mark Mason told analysts Friday. That means the downturn in expenses could arrive two quarters earlier than Citi executives had previously predicted.

But whether the $2.4 trillion-asset company will be able to simultaneously boost revenues remains to be seen, in part because of the underperformance of its wealth management unit. The business, which has struggled with lower profits and higher costs, is in the midst of an overhaul led by Andy Sieg, who joined Citi last fall as the head of global wealth after serving as president of Bank of America's Merrill Wealth Management unit.

On a call following the release of Citi's first-quarter earnings report, bank analyst Jim Mitchell of Seaport Global wanted to know whether Citi has the flexibility to reduce expenses by even more if firmwide revenues fall short of the targeted compound annual growth rate of between 4% and 5% through 2026.

In short, the answer is yes, Mason said.

If there's "softness in revenues," Citi can further rein in spending, though it has no plans to cut back on any spending related to its multiyear risk management overhaul, Mason said. The "flexibility" comes from having an expense target range of between $51 billion and $53 billion, he added.

At the same time, "we've got a mix of businesses that I think we've demonstrated resiliency around … and we expect for those to continue to drive some top-line momentum," Mason said.

"But we've got levers in case they don't."

Citi is deep into a transformation to become a smaller, simpler company. Three years after CEO Jane Fraser took the helm of the New York City-based firm, Citi has restructured around five distinct lines of business, sold off consumer banking franchises in nine countries and begun the process of winding down its consumer units in China, Russia and South Korea.

At the end of March, Citi concluded its most significant reorganization in years by collapsing its management structure from 13 layers to eight. During the second half of this year, it plans to separate its Mexico retail franchise, Banamex, from its corporate and investment banking business, and next year it expects to take Banamex public with an initial public offering.

Excluding the Mexico business, Citi aims to cut its workforce by 20,000 by the end of 2026. Through the first quarter, 7,000 roles were eliminated, including 5,000 through the reduction of managerial levels and others by way of business exits and layoffs in the wealth unit, executives said Friday.

The workforce reductions are expected to save Citi $1.5 billion a year in expenses, they said.

While cost reductions are a key part of Citi's plan to improve its financial performance and shareholder returns, driving profits across its five business lines is also central to the strategy.

Among those five units, wealth management remains a straggler. During the first quarter, the business generated revenues of $1.7 billion, down 4% year-over-year, largely because of a decrease in net interest income due to lower deposit spreads and higher mortgage funding costs, Mason said on the call.

Meanwhile, expenses in the wealth management business rose 3% year over year to $1.7 billion. The uptick stemmed from investments in technology related to improved risk management and internal controls, as well as "platform enhancements" to better serve clients, Mason said.

The wealth management unit's return on tangible common equity, a key performance metric, was 4.6% for the quarter, the lowest among Citi's five businesses. By contrast, Citi's services business, which includes the consistently profitable treasury and trade solutions unit, reported a quarterly ROTCE of 24.1%.

Both Fraser and Mason said improvements in the wealth management business will take time to show up in financial results. Citi executives expect the unit to eventually generate returns above 20%, Mason noted.

The first-quarter increase in expenses in that unit "is not yet reflective" of the work that Sieg has "been steadfast at," Mason said. "There is still some investment in there in technology and in the [wealth management] platform that's important, but I think coming out of the first quarter, you'll start to see some of the reduction in expenses that's a byproduct of that work."

"This is a growth business for us," Mason added.

Analysts who follow Citi were largely positive about the latest quarterly results. Revenues of $21.1 billion were down 2% year over year, but they topped Wall Street's consensus, analysts said.

Earnings per share were $1.58, down from $2.19 a year ago, but above the average estimate of $1.18 per share from analysts surveyed by FactSet Research Systems.

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Operating expenses totaled $14.2 billion, up 7% from the year-ago period. The figure included a special Federal Deposit Insurance Corp. assessment charge of $250 million, $225 million in restructuring charges and another $258 million in "repositioning" charges, the bank reported.

In total, the company spent a combined $1 billion on restructuring activities during the fourth quarter of 2023 and the first quarter of this year, Mason said.

"The revenue beat strikes us as important as it puts [Citigroup] on firmer ground" to meet its full-year 2024 guidance, "which we had considered aggressive previously," Scott Siefers, an analyst at Piper Sandler, wrote in a research note.

All together, Citi "posted a solid beat driven by fee revenue and a lower provision while keeping guidance unchanged," Glenn Schorr, an analyst at Evercore ISI, said in a research note.

"Our gut is investors will be happy, but will key in on where potential risks to the 4% to 5% revenue [compound annual growth rate] may be lurking," Schorr wrote.

"Still, there aren't many cracks to the path Citi has set in motion as they transform and simplify the bank, invest for growth and close the profitability gap to peers," he added.