Turnaround Letter Buy-rated Citigroup (C) reported a healthy 11% increase in per-share earnings. Citi continues to produce profit growth while returning considerable cash to shareholders. At 1.0x price/tangible book value and 8.9x earnings per share, we think the bank’s shares remain a bargain.
Citi reported 1Q 2019 earnings Monday, April 15th, with net income of $4.7 billion increasing 2% from a year ago. Earnings per share increased 11% as the share count declined 9%.
Citi shares had a mildly positive response after the report but have since declined to the pre-release price.
The bank is on-track to achieve its target of 12% return on tangible common equity for the full year (and 13.5% in 2020), largely by a recovery in revenue growth, with controlled expenses and modestly higher credit costs. Its portfolio of financial crisis assets, the “wind down” operations, is just about fully liquidated. All of these improvements should allow it to return additional capital to shareholders in future quarters.
Details of the quarter
Overall revenues declined 2% to $18.6 billion. Net interest margin, essentially the profit margin on lending, increased to 2.72% from 2.64% a year ago, boosting net interest income by 5%. Lower expenses (-3%), partly offset by higher credit losses (+7%), helped boost overall profits.
Citi’s credit quality remains high and continues to improve. Net credit losses of 0.26% of loans increased modestly from a year ago and credit reserves of 1.82% of loans is strong. Non-performing loans fell 14% from a year ago to 0.54% of total loans. Reserves to non-performing loans were over 3.3x.
Citi’s capital strength remains strong. It’s CET1 (common equity tier 1, a frequently used regulatory capital measure) capital ratio was 11.9%, unchanged from year end despite returning $5.1 billion to shareholders through share repurchases ($4.1 billion, or about 2.9% of shares outstanding) and dividends ($1.1 billion). The capital ratio was 12.1% a year ago. Citi believes that a 11.5% ratio is adequate and will likely return capital to shareholders down to that level. Tangible book value per share of $65.55 was 8% higher than a year ago. Overall, Citi’s capital return plan looks to be on-track.
Total loans grew a modest 1% year over year, while total deposits increased 3%.
Global Consumer Banking profits increased 4%, as slightly lower expenses more than offset unchanged revenues. Retail banking loans showed no growth while credit card loans increased 5%. Credit costs ticked up 4%.
Institutional Clients Group profits were unchanged, with 2% lower revenues offset by lower expenses. A 20% increase in investment banking revenues, from strong advisory and investment grade debt underwriting fees, helped offset a 6% decline in Markets and Solutions revenues.
We continue to rate Citigroup (C) shares a BUY with a price target of $85.
Disclosure Note: An employee of the Publisher owns C shares.