Analyst's Notes. Argus Recommendations

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1 Report created Jan 17, 2018 Page 1 OF 5 Citigroup is one of world's largest banks, with global consumer banking, corporate banking, and investment banking operations. Of the largest U.S. banks, Citigroup has by far the greatest exposure to international consumer finance, with major businesses in Latin America and Asia. Analyst's Notes Analysis by Stephen Biggar, January 16, 2018 ARGUS RATING: HOLD Maintaining HOLD following 4Q results On January 16, Citigroup reported adjusted 4Q17 earnings from continuing operations of $1.28 per share, up from $1.14 a year earlier and above the $1.19 consensus. While investment banking was a bright spot, revenue growth of 1.4% was lackluster and below the company's modest 3% target. A sharp rise in credit costs also bears watching. Results exclude a $22 billion non-cash charge related to the write-down of tax deferred assets following recent passage of a lower corporate tax rate, reminiscent of the staggering losses that Citi experienced during the financial crisis. Management guided to a 25% effective tax rate following tax reform, down from about a 31% rate paid in INVESTMENT THESIS We are maintaining our HOLD rating on Citigroup Inc. (NYSE: C) following the company's 4Q earnings report. Revenue growth remains light, while a sharp rise in the cost of credit bears watching. The return on equity of 6.5% also remains well below the peer average. We attended the company's July 25 Investor Day, where management targeted compound annual revenue growth of approximately 3% in We do not see this target as particularly aggressive, though it would be an improvement from the declines experienced in recent years. The company said that 260 basis points of this growth would come from gains in net interest income, driven, at least in the early part of the period, by the Fed's rate hike campaign. Another 110 basis points would come from growth in fee revenues, while the wind-down of legacy assets would subtract 80 basis points. On efficiency, Citi is targeting a low 50% efficiency ratio by 2020, an improvement from the ratio of 58.6% for the four quarters ending June 30. Management expects to generate $2.5 billion of annual efficiency savings through technology and digital initiatives (including process automation and self-service solutions); headcount reductions in high-cost locations; and organizational simplification, which has been a common theme for Citi since the financial crisis. Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) Rating EPS ($) Week High: $ Week Low: $73.97 Closed at $76.84 on 1/12 Quarterly Annual ( Estimate) 7.03 ( Estimate) Revenue ($ in Bil.) Quarterly Annual ( Estimate) 75.8 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dec BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 50% Buy, 44% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $77.11 Target Price Week Price Range $55.23 to $78.44 Shares Outstanding 2.64 Billion Dividend $1.28 Overview Financial Rating MARKET WEIGHT Total % of S&P 500 Cap % Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 75.5% Return on Equity 7.6% Net Margin -7.1% Payout Ratio 0.23 Current Ratio -- Revenue $87.97 Billion After-Tax Income -$6.20 Billion Valuation Current FY P/E Prior FY P/E Price/Sales 2.32 Price/Book 1.09 Book Value/Share $70.85 Capitalization $ Billion Forecasted Growth 1 Year EPS Growth Forecast 18.35% 5 Year EPS Growth Forecast 11.00% 1 Year Dividend Growth Forecast 50.00% Risk Beta 1.57 Institutional Ownership 79.69%

2 Report created Jan 17, 2018 Page 2 OF 5 Based on these revenue and expense projections, management expects compound annual growth of 5%-10% in net income through With aggressive share buybacks, it also looks for compound annual EPS growth of 15%-20%. In all, these targets imply net income of about $20 billion, or $9 per share, in We note that half of the projected EPS growth over the period would come from stock buybacks, 40% from business performance improvement, and 10% from additional interest rate hikes (beyond those already made by the Fed). We have long been concerned about the company's return on tangible common equity, which has lagged that of global peers. This metric, which was just 6.5% in 4Q17, would increase to 11% if the company meets its growth targets and would demonstrate a continued return to financial health (this goal was subsequently increased to 13% due to expected benefits from tax reform). The company expects to return a significant amount of capital to shareholders over the next three years. As part of the late June CCAR process, Citi received approval to double its quarterly dividend and to buy back $15.6 billion of its stock through 2Q18, up sharply from $8.6 billion in the year-earlier plan. The higher dividend will yield about 1.7% - closer to but still below the peer average - and imply a payout ratio of 23% on our 2018 EPS estimate. In the Global Consumer Group, Citi has reduced its presence to 19 markets and intends to use a more concentrated branch presence in urban locations. Like many banks, it is reducing its physical footprint and migrating more customers to digital access. It also plans to rationalize card products and renew key co-branding relationships. Management highlighted U.S. retail banking (aided by higher U.S. interest rates) and Mexico as key contributors to the company's improving ROE, followed by U.S. branded cards, Asia and retail services. Management is targeting 5% compound annual growth in revenue and 13%-15% growth in EPS for this segment through Despite its significant scale, Citi's Institutional Clients Group often lags other global banks in league tables for equity underwriting, announced M&A, and global investment banking. However, it does have a leading market share in treasury and trade solutions and the second-largest share in fixed-income and equity markets, in part reflecting its greater exposure to emerging markets. The segment will focus on multinational companies growing globally, emerging market companies growing beyond their home markets, and financial institutions. Management does not expect a change in compound annual revenue growth, currently about 4%; however, it believes that operating efficiencies will add an additional 70 basis points to profitability. According to management, this will result in an additional $2.5 billion of pretax earnings through 2020, as well as a 14% return on tangible common equity (compared to 13.1% over the past 12 months). We view this as a modest improvement in a highly competitive environment that will move Citi closer to peer average returns. Overall, we believe that the Investor Day presentations clearly Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) Revenue 69,190 76,724 77,219 76,354 69,875 COGS Gross Profit SG&A 33,112 31,991 32,239 29,897 29,287 R&D Operating Income 7,825 19,802 14,701 24,826 21,477 Interest Expense -46,686-46,793-47,993-46,630-45,104 Pretax Income 7,825 19,802 14,701 24,826 21,477 Income Taxes 7 6,186 7,197 7,440 6,444 Tax Rate (%) Net Income 7,541 13,659 7,310 17,242 14,912 Diluted Shares Outstanding 3,016 3,042 3,037 3,008 2,888 EPS Dividend GROWTH RATES (%) Revenue Operating Income Net Income EPS Dividend Sustainable Growth Rate VALUATION ANALYSIS Price: High $53.68 $56.95 $60.95 $61.30 Price: Low $40.28 $45.18 $46.60 $34.52 Price/Sales: High-Low P/E: High-Low Price/Cash Flow: High-Low Financial & Risk Analysis FINANCIAL STRENGTH Cash ($ in Millions) 160, , ,494 Working Capital ($ in Millions) Current Ratio LT Debt/Equity Ratio (%) Total Debt/Equity Ratio (%) RATIOS (%) Gross Profit Margin Operating Margin Net Margin Return On Assets Return On Equity RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex Oper. Income/Int. Exp. (ratio) Payout Ratio The data contained on this page of this report has been provided by Morningstar, Inc. ( 2018 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

3 Report created Jan 17, 2018 Page 3 OF 5 outlined the company's financial goals as it continues its long recovery from the crisis. Although its revenue growth target of 3% through 2020 is not particularly inspiring, efficiencies and capital return targets, if achieved, should provide for healthy EPS growth. At the same time, the company's relatively high exposure to emerging markets, including Mexico (which it specifically referenced as a growth vehicle) has historically added volatility and a higher risk component to Citi's earnings. In addition, plans for faster growth in the credit card segment may result in even faster growth in charge-offs, adding potential credit risk. Management goals for return on equity and capital ratios will put the company about on par with peers, a notable achievement given its recent history. But we believe that recent share price strength already factors in this improvement, and would not pay a premium multiple for financial metrics that are only now approaching peer averages. Looking ahead, we expect Citi shares to trade at a slight discount to those of other global banks. RECENT DEVELOPMENTS Over the past year, C shares have risen 21%, versus a 14% increase in the broad market. On January 16, Citigroup reported adjusted 4Q17 earnings from continuing operations of $1.28 per share, up from $1.14 a year earlier and above the $1.19 consensus. Revenues rose 1.4% to $17.3 billion. Operating expenses were down 0.4%, while the cost of credit increased 16%, which management attributed to volume growth, seasoning in credit cards, an episodic charge-off in the institutional clients group, and a higher loan loss reserve build. Adjusted net income rose 4%, to $3.7 billion. EPS benefited from a 7% decline in average shares outstanding. The allowance for loan losses was $12.4 billion (1.87% of loans) at December 31, 2017, compared to $12.1 billion (1.94%) a year earlier. EARNINGS & GROWTH ANALYSIS Citigroup's main segments include Global Consumer Banking and the Institutional Clients Group. CitiHoldings, the company's liquidating segment, is no longer reported separately. Fourth-quarter results by segment are summarized below. In Global Consumer Banking, revenues rose 6% to $8.4 billion, mostly on higher retail banking revenue. Expenses were up 4%, and with an 8% rise in the cost of credit, attributed partly to volume growth and seasoning, net income was up 9%, to $1.3 billion. In the Institutional Clients Group, net revenues declined 1%, to $8.1 billion, led by gains in investment banking, private banking, and corporate lending. Expenses rose 2%. Following a sharp rise in the cost of credit, to $267 million from $104 million, attributed to a single client event, net income fell 7%, to $2.2 billion. In our view, Citi has made progress in controlling expenses, improving its efficiency ratio, and increasing its return on equity. Peer & Industry Analysis The graphics in this section are designed to allow investors to compare C versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how C stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how C might fit into or modify a diversified portfolio. P/E Value BAC 5-yr Growth Rate(%) JPM C Growth 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating JPM JPMorgan Chase & Co 389, BUY BAC Bank of America Corp 325, BUY C Citigroup Inc 203, HOLD Peer Average 306, P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital

4 Report created Jan 17, 2018 Page 4 OF 5 Efforts have included branch rationalization, management de-layering, real estate and back-office optimization, and sales force productivity improvements - all of which should benefit the company's efficiency ratio. Although repositioning charges were common in recent years, management has expressed optimism that such charges will diminish going forward. Financial metrics for the basic lending businesses have been improving, although they have often been masked by weaker revenue in other areas, such as capital markets. Similar to other large banks, Citi has had a mixed performance with large swings in revenues for investment banking and trading. In all, we look for 3% revenue growth in 2018, efficiency improvement of about 100 basis points, and moderately higher credit costs. Management guided toward a 25% effective tax rate for 2018, down from 31% in 2017, reflecting recent passage of the Tax Cuts and Jobs Act. Largely due to the revised tax rate, we are raising our 2018 EPS estimate to $6.32 from $5.85. We are initiating a 2019 EPS forecast of $7.03. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for Citigroup is Medium-High. Citigroup estimates that its Tier 1 common ratio under Basel III was 12.3% at December 31, 2017, down from 12.6% a year earlier. It estimates a supplementary leverage ratio of 6.7%. In late June 2017, the company reported that the Federal Reserve did not object to its capital plan calling for a doubling of the quarterly dividend, to $0.32 per share, and $15.6 billion in share buybacks over the four quarters beginning in 3Q17 (up from $8.6 billion in the year-earlier plan). In 4Q17, Citi repurchased 74 million shares. The new quarterly dividend of $0.32 implies an annualized yield of about 1.7%. Our dividend estimates are $1.44 for 2018 and $1.68 for The implied payout ratios for these years, 23% for 2018 and 24% for 2019, remain below those of other large-cap banks as the company rebuilds capital. The yield is also below the peer average. We expect above-average dividend increases at Citi for several years. MANAGEMENT & RISKS Citigroup has been led by CEO Michael Corbat since October Much of Citigroup's senior management has changed over the past few years as the bank continues to deal with post-crisis problem loans and strengthens regulatory capital. Risks remain high regarding Citigroup's exposure to several troubled asset classes. Citigroup is broadly exposed to losses on consumer loans around the world, including a high-risk pool of mortgages in the U.S. COMPANY DESCRIPTION Citigroup is one of world's largest banks, with global consumer banking, corporate banking, and investment banking operations. Of the largest U.S. banks, Citigroup has by far the greatest exposure to international consumer finance, with major businesses in Latin America and Asia. VALUATION Citigroup shares moved above tangible book value in 3Q17, improving from a nearly 50% discount to tangible book value in mid Although we recognize that the company's capital metrics have improved, we believe that the shares are fairly valued in the context of the company's remaining challenges, which include low revenue growth and ROE. Citi's return on tangible common equity in 4Q was 6.5%, well below the returns of better-performing global bank peers, as well as the 10% threshold that we believe would mark a return to financial health. In addition, the shares yield only 1.7%, well below the peer average. C shares trade at 12.2-times our 2018 EPS estimate, which we view as an appropriate discount to the average multiple for large global banks. On January 16, HOLD-rated C closed at $77.11, up $0.33.

5 METHODOLOGY & DISCLAIMERS Report created Jan 17, 2018 Page 5 OF 5 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2018 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.