Citigroup Earnings: Continued Expense Diligence Will Be Key for Turnaround Efforts

Key Morningstar Metrics for Citigroup

• Fair Value Estimate: $68.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Citigroup’s Earnings

Citigroup C reported middling second-quarter results, with earnings per share of $1.52, compared with $1.33 in the year-ago quarter. Citi was issued civil money penalties totaling $136 million by regulators for not meeting data quality milestones related to the Federal Reserve Board’s 2020 consent order. The bank has committed to investing more resources to resolve the data quality issues within its regulatory reporting. We maintain our fair value estimate of $68 per share as we incorporate second-quarter results. Our long-term outlook is largely unchanged.

Second-quarter net interest income was flattish on a sequential basis and declined by 3% on a year-over-year basis. Noninterest revenue grew 20% on a year-over-year basis, mainly driven by improvements in the services business, buoyant equity markets valuations, solid trading revenue, and a 60% growth in investment banking revenue.

Excluding the FDIC charge and civil money penalties, Citi’s second-half expenses will have to come in around 3% lower than the first half to meet its full-year expense guidance. We think the bank should be able to do so, given the lower expenses related to organizational efficiency initiatives, market exits, and elimination of certain stranded costs. One key milestone in Citi’s business transformation plan is evidence that major restructuring initiatives are now near completion, allowing the bank to focus more on offensive growth opportunities, especially its flagship services segment. Overall, Citi is tracking well to meet our full-year expectations, but the second half is still crucial to ensure it can drive expense efficiency and continue to capitalize on the cost savings from its extensive reorganization.