Analyst Note, 15. januar, Jim Sinegal
Citigroup's complexity is a double-edge sword for the company, providing plenty of room to simplify the business and cut costs compared with peers, but also taking a huge toll on near-term performance. Citigroup's fourth-quarter results were hurt by weakness in trading--principal transactions revenue totaled only $418 million, down 74% from the prior quarter--and more important, $3.5 billion in legal and restructuring charges, leading to net income of only $0.06 per share during the quarter. We don't expect expenses to persist at this level, but neither do we expect restructuring, compliance, and legal expenses to disappear completely. We forecast noninterest expenses totaling $51 billion annually by the end of our forecast period, versus a reported $44 billion in "core operating expenses" in 2014, and we plan to maintain our $57 fair value estimate.
Management expects another tough year in 2015, and we think Citigroup's emerging-market exposure could be a short-term negative. We still think the bank's international exposure will result in faster growth than peers over the long run, but both growth and profitability could suffer relative to U.S.-focused banks over the next 12 months. Not only is the company experiencing spread compression and regulatory issues, but many international economies are heavily exposed to falling oil prices and slowing Chinese growth. Consumer credit costs have increased significantly in Latin America over the past two years, and Asia may be set to experience a similar phenomenon.
We think Citigroup is positioning itself for capital return following its 2015 Comprehensive Capital Analysis and Review. The company increased its Basel III common equity Tier 1 capital balance by $10.9 billion in 2014 and increased its budget for capital planning. Given these developments, along with the fact that the company generated positive income in each quarter, we expect progress on the capital return front by midyear.
Bulls and bears say
Bulls say
- Citigroup is leveraged to the rise of Asia, Latin America, and other emerging markets, while its competitors will struggle with lackluster loan demand in the U.S. and Western Europe.
- Citigroup is recapitalized and refocused under new management--the perfect conditions for a successful turnaround.
- A shrinking balance sheet, falling expenses, and a harsher regulatory environment provide a perfect combination for capital return over the next five years.
Bears say
- Many emerging markets depend on the Chinese economy, which looks more vulnerable with each passing day.
- The culture that led to Citigroup's bailout will not be easy to change; a quarter of a million employees under one umbrella for a quarter century cannot change their stripes overnight. The company may be too big for anyone to manage successfully.
- Citi Holdings will be a drag on earnings for the foreseeable future.
©2014 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, “Morningstar”), (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be accurate, complete, or timely. Certain information may be self-reported by the investment vehicle and not subject to independent verification. Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance is no guarantee of future results.
