Citigroup's turnaround continues to take shape

Citigroup's Q2 earnings report showcased a solid performance with revenues and several key metrics exceeding analyst expectations. The bank reported a revenue of $20.14 billion, slightly above the estimated $20.11 billion. This included a $400 million gain related to the Visa B exchange completed in the quarter. Citigroup's total loans were $687.7 billion, surpassing the expected $680.54 billion, and end-of-period deposits stood at approximately $1.3 trillion. The Markets segment posted a revenue of $5.09 billion, beating the $4.75 billion estimate, while Wealth revenue was $1.81 billion, above the anticipated $1.73 billion.

The stock is trading higher as investors continue to see signs of a turnaround. Investors see the stock as a cheap alternative to peers as it trades at approximately 0.7x book compared to JP Morgan (JPM) which is much more expensive at 1.9x.

Net Interest Income (NII) was $13.5 billion, down 3% year-over-year and flat sequentially. The bank's non-interest revenue rose by 20% year-over-year to $6.65 billion but fell 13% from the previous quarter. Expenses decreased by 6% sequentially to $13.35 billion, reflecting efforts to manage costs effectively. However, credit costs surged to $2.48 billion, a 36% increase from the previous year, driven by net credit losses of $2.28 billion and an additional $193 million in allowances for credit losses.

Despite these positive results, Citigroup's CFO noted that the bank's expenses for 2024 are expected to be at the higher end of the $53.5 billion to $53.8 billion guidance range, excluding the FDIC special assessment and civil money penalties. The Q2 operating expense was $13.35 billion, a 1.6% decrease year-over-year. The bank is committed to investing whatever is needed for regulatory transformation efforts, reflecting ongoing costs related to regulatory compliance and fines booked in Q2.

Citigroup's credit costs were a significant focus, with a total of $2.48 billion, driven by net credit losses of $2.28 billion and an additional $193 million in allowances for credit losses. The CFO highlighted that credit card spending volumes are up 3%, primarily from higher credit score consumers, indicating a resilient but cautious consumer base. The bank forecast continued momentum in US personal banking, branded credit cards, and retail services, aligning with the increase in credit card spending.

The bank's Q2 performance in its various segments also drew attention. Banking revenue was $1.63 billion, exceeding the $1.55 billion estimate, while Investment Banking revenue was slightly below expectations at $853 million compared to the $870.4 million estimate. Services revenue came in at $4.68 billion, slightly below the expected $4.82 billion, indicating some areas for improvement. The FICC (Fixed Income, Currencies, and Commodities) sales and trading revenue was $3.56 billion, marginally missing the $3.61 billion estimate.

Citigroup's Services unit generated $1.5 billion in net income, boasting a 23.8% RoTCE. The Markets segment followed with $1.4 billion in net income and a RoTCE of 10.7%. Banking reported $400 million in net income with a 7.5% RoTCE, while Wealth earned $200 million, resulting in a 6.4% RoTCE. The U.S. Personal Banking (USPB) segment posted $100 million in net income with a RoTCE of 1.9%.

Looking ahead, Citigroup reaffirmed its commitment to achieving an 11-12% RoTCE in the medium term and maintained its full-year adjusted revenue forecast of approximately $80 billion to $81 billion. The bank continues to make significant progress in simplifying its operations and organizational structure. The CEO emphasized that modernizing infrastructure and automating processes are key priorities to enhance client service and strengthen controls.

Overall, Citigroup's Q2 results reflect a strong finish to the quarter, with positive performance across several segments and key metrics. However, the bank's higher-than-expected expenses and ongoing regulatory costs underscore the challenges ahead. The commentary from the CFO and CEO indicates a strategic focus on maintaining momentum in core banking areas while addressing regulatory requirements and operational efficiencies.