Pressure mounts on Citi to beef up returns
Citigroup eked out profit growth in the first quarter, but return on equity remains a sore spot.
The New York bank has said it expects to hit 12% in return on tangible common equity for the full 2019 and at least 13.5% in 2020. The 2019 target seems feasible, considering that Citi’s return in the first quarter was 11.9%.
But investors are more skeptical that the 2020 target is within reach. Citi has cut expenses, but not fast enough to meet that goal, said Marty Mosby, an analyst at Vining Sparks. Moreover, Citi executives have said that the company will continue to make large investments in some pivotal areas, such as customer service.
“When they said that they will need to make investments, they admitted that they may not get there,” Mosby said in an interview.
One of the reasons the metric presents an issue for Citi is that it trails some of its peers in that regard. Among the megabanks that as of Monday had reported first-quarter results, JPMorgan Chase had a return on tangible common equity of 19%, and the embattled Wells Fargo was at 15.16%.
Even Cit's 12% target for 2019 is not assured. Over the past several quarters, its ROTCE level has fluctuated. It went from 10.8% in the second quarter, to 11.3% in the third and 11% in the fourth.
Many investors already expect Citigroup to miss its targets on equity returns, Saul Martinez, an analyst at UBS, said during Citi's first-quarter conference call Monday. Martinez and other analysts pressed Citi’s management team to explain why they continue to be bullish in the face of such skepticism.
“Obviously, the Street is well below your guidance for this year and especially for 2020,” Martinez said. “Where do you think there is the most scope for outperformance? Where do you guys differ, you think, in terms of what your expectations are versus where you think the Street is?”
Chief Financial Officer Mark Mason, handling his first conference call since succeeding John Gerspach in February, responded that the main discrepancy is on analysts’ projections for Citigroup’s cost of credit. Citi’s own estimates are “lower than the Street’s,” he said.
In the fourth quarter, cost of credit (which includes net credit losses, reserves and loan-loss provisions) rose 7% to $2 billion. Citigroup did not disclose its projections for cost of credit.
To be certain, Citigroup has made progress on lowering its expense levels. Its efficiency ratio improved to 57% in the first quarter, compared with 57.8% in the fourth quarter of 2018. It was the 10th consecutive quarter that the ratio improved. Mason said the company stands by its targets of 57% for the full year and 53% in 2020.
Noninterest expense dropped 3.1% to $10.6 billion, on a yearly basis, boosted by Citi’s recent technology improvements designed to improve efficiency, as well as the wind-down of legacy assets.
Overall, net income rose was to $4.7 billion, 2% higher than a year earlier. Its earnings per share of $1.87 was 7 cents better than the mean estimate of analysts compiled by FactSet Research Systems.
Accelerating revenue growth may also help Citi meet its equity-return goals, as revenue appeared to pick up steam during the final weeks of the first quarter. Mosby said. Total revenue fell 2% year over year to $18.6 billion. But revenue grew 8.5% compared with the previous quarter, thanks in large part to stronger volume in credit card loans and other types of consumer lending in the U.S.
“Revenue picked up as we got to March,” Mosby said. “The revenue story is moving in the right direction.”
Perhaps those revenue figures are the driving reason behind Citi executives’ persistent optimism. Even while saying that the bank will keep making costly investments in technology when warranted, Mason firmly reiterated the company’s equity-return forecasts.
“We came into the year on the heels of a fourth quarter that was obviously under a lot of revenue pressure, and so we wanted to be thoughtful about managing all the levers that we had,” Mason said.
“We're managing those other levers,” Mason said, “whether it be the cost of credit or capital to ensure that we're getting to that ROTCE of 12% and that we stay on a trajectory to get to 13.5%-plus in the outer years.”