Turnaround Letter company Citigroup (C) reported fourth quarter 2019 results that were modestly ahead of consensus estimates. Adjusted earnings of $1.90/share were about 5% ahead of estimates, while revenues of $18.4 billion were about 3% better than estimates. As with prior quarters, Citigroup continues to make incremental yet steady progress with its turnaround.
Pre-tax profits increased 7% from a year ago, as revenues rose 7% and operating expenses grew 6%. Credit expenses increased 15%, driven by several large losses in its institutional business, some increases in its consumer business and a boost to its reserves for future credit losses. Net income (not adjusted) increased 15% from a year ago. Combined with the 10% decline in share count, per share earnings (not adjusted) increased 34% from a year ago. Adjusting for the tax item, earnings per share increased 18% from a year ago.
Other metrics showed strength as well. Return on tangible common equity (at 12.4%), capital strength (CET1 capital at 11.7%), loan loss reserves (at 1.84% of loans), loan growth (at 2%), deposit growth (at 6%) and the efficiency ratio (at 56.9%) all were healthy. Net interest income, which is based partly on the yield curve and partly on same-maturity rate spreads, increased from a year ago despite a difficult market.
Citigroup is performing well across the board. It has hit its performance targets, including profitability, capital strength and capital-return to shareholders. Additionally, it is successfully navigating the increasingly competitive and complicated global capital markets, as well as winding down its legacy assets (a residual of the 2009 global financial crisis).
The operational turnaround is largely complete, results are showing good momentum that may or may not be sustainable, yet credit costs are starting to tick upwards. At $81, the shares trade essentially at our price target of $85 (~1.0x tangible book value and 1.15x book value).
The company may continue to show more improvements, and the shares may continue to rise, but we believe the risk/reward is no longer favorable. We are moving Citigroup to a Sell.
We are moving our rating on Citigroup (C) shares to a SELL.
Disclosure Note: One or more employees of the Publisher own C shares.