Citigroup reported Wednesday it plans to spin off its Mexican retail and small and mid-market banking operations through an initial public offering (IPO) rather than sell the Banamex unit outright. Banamex’s institutional business will remain part of Citi. Citigroup has been on a path of rationalizing it’s business, the Bank reported better than expected first quarter earnings of $2.19 per share for the quarter beating estimates of $1.70 a share last month. Citi divested its consumer business in India and generated a gain on the sale. Citigroup (C) plans to resume a “modest level” of share buybacks this quarter.
Citigroup is working through its strategic transformation under Jane Fraser and the market will be looking for progress reports. The bank’s plan is to exit 14 consumer banking markets in order to focus on four wealth centers: Singapore, Hong Kong, the UAE, and London. Mexico was one of those 14 in the plan.
The move comes after earlier this month, the bank was reported to be close to a deal to sell its retail operations to Grupo Mexico for ~$ 7B.
“After careful consideration, we concluded the optimal path to maximizing the value of Banamex for our shareholders and advancing our goal to simplify our firm is to pivot from our dual path approach to focus solely on an IPO of the business,” CEO Jane Fraser said.
Citigroup said it expects that the separation of the institutional business from the rest of Banamex will be completed in H2 2024 and the IPO of the retail, small and mid-sized business operations will take place in 2025.
Banamex will continue to be reported as part of its parent’s operations until ownership falls below a 50% stake, at which time the business will be deconsolidated from Citi’s results.
Buybacks Resume
The plan allows Citigroup to resume a “modest level” of share buybacks this quarter, Chief Financial Officer Mark Mason said. After that, the company will access stock buybacks on a quarter-by-quarter basis.
C: Stock Market Reaction
- 44.50 -1.41(3.07%) Morning
- 44.50 -8.18(15.53%) past year
- 44.50 -25.93(36.82%) past 5 years
- 52wk High $52.83
- 52wk Low $38.74
Oversea Market Exits
Over the last year, the bank announced plans to exit 14 international markets and has made progress on either closing sales or winding down 10 of those businesses. (11, including Mexico when the IPO is complete)
Citigroup closed two more divestitures during the first quarter, including its consumer business in India to Axis Bank Limited that generated a gain on the sale. The deal was announced in March 2022. The sale includes retail banking, credit cards, wealth management and consumer loans, as well as the transfer of around 3,200 Citi employees. The transaction is anticipated to result in a regulatory capital release of $1.4 billion.
Net income was down 19% year over year when excluding the impact of the sales.
Citigroup Q1 2023 Earnings
“Our robust and well-managed balance sheet was a source of strength for our clients, and we continue making progress in executing our strategy focused on our five core interconnected businesses while simplifying and transforming the firm,” CEO Jane Fraser said in a statement.
Investment Banking Fees Slide Continues
Credit Losses
The bank said it set aside more money for credit losses going forward of $1.98 billion, slightly above the $1.89 billion provision for credit losses expected by analysts, according to StreetAccount, and up 7% from the prior quarter. Citigroup’s total allowance for credit losses on loans was $17.2 billion at the end of the reported quarter compared with $15.4 billion in the year-ago period.
Total non-accrual loans declined 23% year over year to $2.6 billion.
Citigroup’s costs of credit for the first quarter were $1.97 billion compared with the $755 million recorded in the year-earlier quarter.
Capital Position
- At the end of the first quarter, Citigroup’s Common Equity Tier 1 capital ratio was 13.4%, up from 11.4% in first-quarter 2022.
- The company’s supplementary leverage ratio in the reported quarter was at 5.9%, rising year over year from 5.6%.
Accumulated Other Comprehensive Income or AOCI
With higher rates banks having parked park excess funds in government bonds and mortgage-backed securities the losses are pronounced. Both investments have fallen in value sharply this year, which means banks will have to mark down their portfolios accordingly. These losses are reported as changes to “accumulated other comprehensive income,” or AOCI, but the important thing is they draw down capital.
Analysts Outlook
Morningstar Note by – Eric Compton, CFA Apr 5, 2023
Citi’s Cheap but Will Require Patience
Citigroup was our top pick in 2022, and it has held up better over the past year than any bank we cover except for JPMorgan JPM. Even so, it is still trading at one of the largest discounts to fair value in our coverage. We see the risk of deposit outflows as minimal, given that Citi is a global systemically important bank. Citigroup has some of the lowest unrealized losses on securities relative to overall capital in our coverage, and it has some idiosyncratic catalysts—finishing the Mexico sale, selling off the rest of its noncore business units, providing expense guidance for 2024, and moving beyond regulatory hurdles—that we think can help it break the overall correlation with the banking sector over time. We also wonder if the recent turmoil in the European banking sector could open up additional opportunities for growth for Citigroup in the near to medium term.
While we like Citigroup’s valuation, investors should understand what they are getting into with the bank, which we view as a deep-value turnaround play with a multiyear time horizon. Also, a recession might uniquely pressure Citigroup, which has larger proportional credit card exposure relative to its peers. Still, we think long-term investors are being more than adequately compensated to bear these risks, and we see material upside to the current stock price.
Source: C, TC, WSJ
From The TradersCommunity Research Desk