March 09, 2015 Citigroup Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 04/09/2014 Current Price (03/06/15) $53.06 Target Price $56.00 52-Week High $56.37 52-Week Low $45.68 One-Year Return (%) 7.01 Beta 1.89 Average Daily Volume (sh) 17,482,088 Shares Outstanding (mil) 3,034 Market Capitalization ($mil) $160,984 Short Interest Ratio (days) 1.80 Institutional Ownership (%) 72 Insider Ownership (%) 1 Annual Cash Dividend $0.04 Dividend Yield (%) 0.08 5-Yr. Historical Growth Rates Sales (%) 1.9 Earnings Per Share (%) 7.0 Dividend (%) 0.0 using TTM EPS 14.9 using 2015 Estimate 9.9 using 2016 Estimate 9.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page (C-NYSE) SUMMARY Higher legal and repositioning costs weighed on the results of Citigroup as its adjusted earnings for fourth-quarter 2014 missed the Zacks Consensus Estimate and came below the yearago figure as well. Further results reflected lower revenues and decrease in loans and deposits. Moreover, elevated expenses were a concern. However, continued improvement in credit quality and a strong capital position were the tailwinds. We believe the company s streamlining initiatives and attractive core business are impressive. Yet, a low interest-rate environment, expanding cost base and regulatory issues along with litigation risks remain headwinds. Considering the tepid economic recovery, we believe that robust topline expansion will remain elusive in the near term. Risk Level * Below Avg., Type of Stock Large-Value Industry Banks-Major Reg Zacks Industry Rank * 174 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 20,567 A 20,479 A 18,240 A 17,943 A 77,229 A 2014 20,117 A 19,375 A 19,975 A 17,805 A 77,272 A 2015 20,024 E 19,477 E 19,458 E 18,529 E 77,488 E 2016 80,539 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.28 A $1.25 A $1.02 A $0.82 A $4.37 A 2014 $1.30 A $1.24 A $0.95 A $0.06 A $3.55 A 2015 $1.42 E $1.33 E $1.37 E $1.22 E $5.34 E 2016 $5.81 E Projected EPS Growth - Next 5 Years % 11 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Citigroup Inc. (C) is a globally diversified financial services holding company providing a range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management to consumers, corporations, governments and institutions. Citigroup has approximately 200 million customer accounts in more than 160 countries and jurisdictions. In May 2013, Citigroup entered into a definitive agreement to sell Credicard, its non-citibank branded cards and consumer finance business in Brazil (Brazil Credicard), for about $1.24 billion to Banco Itau Unibanco. The sale resulted in an after-tax gain of $189 million upon closing. Citigroup retained its Citibranded and Diners credit cards, along with certain affluent segments currently associated with Credicard, which are re-branded as Citi. Citigroup currently operates via two primary business segments. Citicorp operates as a global bank for consumers and businesses and represents Citigroup s core franchise. It consists of two primary businesses, Global Consumer Banking (GCB) and Institutional Clients Group (ICG). GCB business includes retail banking, Citi-branded cards and Citi retail services in North America, Asia, Latin America, Europe, Middle East, and Africa. The ICG consists of Banking and Markets and Securities services. Citicorp also includes Corporate/Other, which comprise global staff functions and other corporate expenses, unallocated global operations as well as technology, Corporate Treasury and discontinued operations. Citi Holdings comprises consumer loans, international consumer lending (including Western Europe retail banking and cards and Japan Consumer Finance), certain portfolios of securities, loans and other assets along with retail alternative investments. As previously announced, Citigroup intends to exit its consumer businesses in 11 markets and its consumer finance business in Korea in GCB and certain businesses in ICG. Effective in the first quarter of 2015, these businesses will be reported as part of Citi Holdings. Reverse Stock Split On Mar 21, 2011, Citigroup announced a 1-for-10 reverse stock split. The reverse split became effective after the close of trading on May 6, and reduced the share count to 2.9 billion from 29.1 billion. REASONS TO BUY Organic growth remained a key strength at Citigroup, as reflected by its revenue growth story in the past with a CAGR of 5.4% over three years (2012 2014). With continued economic recovery, we expect the bank to record a significant rebound in revenues in the coming quarters. The stress test results for 2014 were out in March and this time Citigroup emerged triumphant, though its capital plan was rejected based on certain qualitative reasons. However, the bank has been allowed to continue with its existing capital deployment plan. Citigroup is fully cooperating with the Fed and is working hard to meet the latter s expectations and clear the doubt over the bank s capital planning process. Based on the fundamentals, we believe the capital plan this year will get the Fed s approval, thereby boosting investors confidence. Equity Research C Page 2
REASONS TO SELL Citigroup has a diverse business model with a significant portion of the revenue being generated from outside the U.S. Faced with a slowdown in the U.S. market, Citigroup is emphasizing on growth in core operations through restructuring and streamlining operations internationally. This strategy augurs well and we expect such efforts to help augment the company s profitability. Notably, in 2014, the company has sold or closed down 130 branches in North America and have announced plans to sell or shut an additional 60 branches in early 2015. Moreover, repositioning charges are expected to produce about $3.4 billion of annual savings. The company s long-term strategy to shrink its non-core assets and increase its fee-based business mix would improve the valuation over time. The rundown of Citi Holdings, its legacy problem assets portfolio, is on track. Notably, management expects generating ROA between 90 and 110 basis points in 2015 with reduction in losses in Citi Holdings. Citi Holdings assets decreased 16% from 2013 to $98 billion and represented only 5% of the company s total assets at the end of 2014. These runoffs ultimately reduce the company s risk profile and free up capital that the company continues to invest in its core businesses. Amid a tepid economic recovery, bolstering revenue has become a challenge over the rising expenses. The company continues to encounter many investigations and lawsuits from the investors and regulators. Though the company resolved certain litigations related to the sale of risky mortgage backed securities and other issues, many of the cases are yet to be resolved. Therefore, legal and related expenses remained elevated in 2014 as Citigroup continues to work through its legacy legal issues within Citi Holdings. All these factors are expected to lead to increased expenses and litigation provisions in the near term. Although Citigroup s underlying franchises of the consumer businesses have remained strong, revenues have continuously been under pressure for the past several quarters. Considering the protracted economic recovery and the low interest rate environment, any substantial growth in the top line is expected to remain limited in the upcoming quarters. Moreover, management expects net interest margin to remain at 2014 levels of 290 basis points in first-half 2015. Citigroup aims at de-leveraging Citi Holdings through a number of steps that include joint ventures, dispositions and asset runoffs. As a matter of fact, the company has already announced the sale of a number of its businesses within this segment. Though the strategy to shrink non-core assets would improve the valuation over time, the shrinking of the Citi Holdings portfolio would result in revenue challenges, partially restricting the upside potential of the stock. Citigroup continues to be subject to a significant number of regulatory changes and uncertainties across the U.S. and the non-u.s. jurisdictions in which it operates. Ongoing regulatory changes and uncertainties make Citigroup s business planning difficult and could require the company to change its business models, all of which could negatively impact Citigroup s individual businesses, overall strategy and results of operations as well as realization of its deferred tax assets (DTAs). Ongoing regulatory changes also result in higher regulatory and compliance risks and costs. Notably, Citigroup estimates regulatory and compliance costs to have grown about 10% annually since 2011. Equity Research C Page 3
RECENT NEWS Citigroup Slips on Dismal Q4 Earnings, Profits Down Jan 15, 2015 After delivering positive earnings surprises in the prior three quarters, Citigroup failed to keep the winning streak alive. Adjusted earnings per share for fourth-quarter 2014 came in at $0.06, missing the Zacks Consensus Estimate of $0.09. Further, earnings came significantly below the year-ago figure of $0.82 per share. Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup reported net income of $350 million, which was significantly down from $2.5 billion reported in the prioryear quarter. For the year ended 2014, adjusted earnings per share came in at $3.55, beating the Zacks Consensus Estimate of $2.20. However, it compared unfavorably with the prior-year figure of $4.37 per share. Adjusted costs of credit for the fourth quarter at Citigroup were down 3% year over year to $2.0 billion. The improvement was primarily attributable to a decline in net credit losses, partially offset by lower net release of loan loss reserves. Performance in Detail Adjusted revenues of Citigroup came slightly lower than the prior-year quarter to $17.8 billion. Also, the revenue figure missed the Zacks Consensus Estimate of $18.7 billion. Excluding CVA/DVA, Citigroup revenues decreased 1% from the prior-year period to $17.8 billion. The decrease reflected a 1% decline in revenues of Citicorp, which was partially offset by a slight rise in revenues of Citi Holdings. Adjusted revenues for the year ended 2014 were $77.3 billion, up 1% year over year. However, it came below the Zacks Consensus Estimate of $77.9 billion. At Citicorp, adjusted revenues came in at $16.5 billion, down 1% year over year. Excluding CVA/DVA, revenues were stable from the prior-year quarter. While revenues of Corporate/Other declined, revenues in the Institutional Clients Group (ICG) and GCB remained stable year over year. Further, Citi Holdings reported adjusted revenues of $1.3 billion, up 1% year over year. Excluding CVA/DVA, revenues exhibited slight growth year over year, reflecting increased gains on asset sales and lower cost of funds. Notably, since its formation, Citi Holdings reported full-year profit for the first time. Operating expenses at Citigroup were up 21% year over year to $14.4 billion. The rise was primarily owing to increased legal and related costs and repositioning charges and elevated regulatory and compliance costs. These were partially offset by continued cost reduction efforts and impact of foreign exchange translation. Notably, in the fourth quarter operating expenses included legal and related expenses of $2.9 billion, up from $809 million in the prior-year-quarter, and $655 million of repositioning charges, up from $234 million in the prior-year-quarter. At quarter end, Citigroup s end of period assets was $1.9 trillion, up 2% year over year. The company s loans decreased 3% year over year to $645 billion and deposits decreased 7% to $899 billion, respectively. Citi Holdings assets decreased 16% from the prior-year quarter level to $98 billion and represented just 5% of the company s total assets at third-quarter end. Equity Research C Page 4
Credit Quality Citigroup s credit quality improved in the reported quarter. Total non-accrual assets declined 22% year over year to $7.4 billion. The company reported a 38% fall in corporate non-accrual loans and a decline of 17% was reported in consumer non-accrual loans. Citigroup s total allowance for loan losses was $16.0 billion at quarter end, or 2.50% of total loans, down from $19.6 billion, or 2.97%, in the prior-year period. Capital Position At the quarter end, Citigroup s estimated Basel III Common Equity Tier 1 Capital ratio was 10.5%, increasing from 10.1% in the prior-year quarter. The company s estimated Basel III Supplementary Leverage Ratio for fourth-quarter 2014 was 6.0%, up from 5.4% in the prior-year quarter. As of Dec 31, 2014, book value per share was $66.16 and tangible book value per share was $56.83, up 1% and 3%, respectively, from the prior-year period end. Capital Deployment Update On Jan 15, 2015, Citigroup s board of directors announced a quarterly dividend of $0.01 per share on its common shares. This dividend was paid on Feb 27, 2015 to shareholders of record as of Feb 2. Citigroup Sheds OneMain for $4.25 Billion to Springleaf Mar 3, 2015 Citigroup announced the sale of its consumer-lending business OneMain Financial to Springleaf Holdings, LLC (LEAF) in a cash deal valued at $4.25 billion. The agreement which is subject to regulatory approvals is anticipated to close in third-quarter 2015. With over 2.5 million customers and about 2,000 branches, the combined entity of Springleaf-OneMain will stand as the largest subprime lender in the U.S. The consolidation of 200 branches is expected in mid-2016 and Springleaf anticipates the deal to be accretive to its after-tax earnings in 2015. The proceeds from the deal will be used partly by Citigroup to pay off certain funds, which were supporting Citi Holdings. Moreover, the withdrawal of funds along with the sale is anticipated to increase earnings before income taxes by about $1 billion. Citigroup Anticipates Bleak Q1 Trading Revenues Mar 2, 2015 At an investor conference in Florida on Monday, Citigroup s Chief Financial Officer John Gerspach came up with its latest outlook. The bank expects a first-quarter 2015 revenue drop in fixed-income and equities trading, impacted by the subdued start in spread products and loss incurred in January from price fluctuations in the Swiss franc. Broadly, Citigroup anticipates total fixed-income and equities trading revenue to be down in the mid- to high-single digits year over year. Notably, Citigroup incurred more than $200 million losses in January following the Swiss central bank s decision to allow the franc trade freely against the Euro. However, Gerspach noted that client activity across rates and currencies is strong in the current quarter and therefore anticipates rates and currencies revenue to rise on a year-over-year basis. Equity Research C Page 5
Citigroup to Vend Japan Retail Business to Sumitomo Mitsui Dec 25, 2014 In continuation of its strategy to trim the Global Consumer Bank ( GCB ) operations, Citigroup is shrinking its Japanese footprint. The Wall Street banking giant is set to vend its retail banking operations in Japan to Sumitomo Mitsui Financial Group, Inc. (SMFG). The deal is expected to close in Oct 2015. The deal comprises transfer of the retail banking operations of Citibank Japan Ltd. including its retail branches network and ATMs across Japan to a trust bank subsidiary of Sumitomo Mitsui Banking Corporation ( SMBC ) SMBC Trust Bank Limited. It also includes around 740,000 customer accounts and around 2.5 trillion ($21.0 billion) of yen and foreign currency deposits as of Nov 30, 2014. Also, about 1,600 Citi Japan employees will be shifted. Citigroup stated that the financial terms of the transaction are immaterial to the company. However, upon closure of the deal, Citigroup, which has presence in Japan for over a century, will continue to serve Japanese and non-japanese corporate, institutional and governmental clients in Japan through its corporate and investment banking, markets and transaction services businesses that are operated from Citibank Japan Ltd. and Citigroup Global Markets Japan Inc. In connection with this deal, Citibank Japan CEO Peter B. Eliot said, This is a positive outcome for Citi, as well as for the employees and customers of our retail banking business in Japan. This decision furthers Citi's global strategy of focusing our resources where we feel we have a competitive advantage, which includes our Institutional Clients Group businesses in Japan. Owing to the transaction, SMBC aims to expand its client base, boost foreign currency funding source and provide better services to its customers. Citigroup Announces Foreign Exchange Settlements Nov 12, 2014 Citigroup announced it has entered into settlements with the U.K. Financial Conduct Authority (FCA), the Office of the U.S. Comptroller of the Currency (OCC) and the U.S. Commodity Futures Trading Commission (CFTC) to settle ongoing investigations into Citigroup s foreign exchange business. Under the terms of the settlements, Citigroup will pay a total of about $1.018 billion and agreed to further enhance the control framework governing its foreign exchange business. The payments include approximately $358 million to the FCA, $350 million to the OCC and $310 million to the CFTC. These payments are covered by Citigroup s existing legal reserves as of the third quarter 2014. Equity Research C Page 6
VALUATION Citigroup shares currently trade at 9.9x the Zacks Consensus Estimate for 2015, representing a 27.2% discount to the industry average of 13.6x. On a price-to-book basis (P/B), shares trade at 0.8x, reflecting a 38.5% discount to the industry average of 1.3x. Hence on both and P/B basis the valuation looks attractive. Citigroup has a trailing 12-month ROE of 5.9%, compared with the industry average of 9.6%. Our six-month target price of $56.00 equates to about 10.5x the Zacks Consensus Estimate for 2015. Combined with a quarterly dividend of $0.01 per share, this price target implies an expected return of 5.6% over that period. This is consistent with our long-term Neutral recommendation on the stock. Currently, Citigroup carries a Zacks Rank #3 (Hold). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Citigroup Inc. (C) 9.9 9.1 11.0 10.6 14.9 14.8 6.9 Industry Average 13.6 11.9 8.9 11.0 15.3 35.5 9.0 S&P 500 16.5 15.4 10.7 14.6 18.1 18.4 12.0 JPMorgan Chase & Co. (JPM) 10.4 9.4 5.6 8.6 11.5 17.5 6.4 Bank of America Corporation (BAC) 11.4 9.7 8.0 15.8 28.5 59.6 7.9 Wells Fargo & Company (WFC) 13.1 12.1 9.8 11.1 13.3 19.0 8.9 U.S. Bancorp (USB) 13.7 12.6 7.4 12.6 14.6 25.3 10.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Citigroup Inc. (C) 0.8 0.8 0.4 5.9 1.1 0.1-12.1 Industry Average 1.3 1.3 1.3 9.6 0.9 2.0 3.6 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research C Page 7
Earnings Surprise and Estimate Revision History Equity Research C Page 8
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of C. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform - 15.6%, Neutral - 74.9%, Underperform 8.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11A Kalyan Nandy Priti Dhanuka Priti Dhanuka Ishani Mukherjee N/A Equity Research C Page 9