Citigroup Earnings: Higher Rates Boost Net Interest Income, but That Lift to Revenues Will Likely Fade

Citigroup Stock at a Glance

• Fair Value Estimate: $73
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None

Citigroup Earnings Update

Citigroup C reported results largely in line with our expectations, with earnings per share coming in at $1.33 compared with our forecast of $1.34. The full-year revenue outlook was unchanged at $78 billion-$79 billion, and the expense outlook was unchanged at $54 billion. Within revenue net interest income, or NII, is outperforming, while markets, investment banking, and wealth revenue remain under some pressure. Management raised its NII outlook by $1 billion, implying weaker fee performance for the year. We believe current NII dynamics represent the peak of the cycle, with some of the outperformance likely to go away as that cycle plays out. While we acknowledge some of the cyclical headwinds at play for fees, we see them as more core to the overall business plan, so we view the stability in revenue slightly negatively. One strong point remains the bank’s revenue from services and Treasury and trade solutions, which continue to do well and have been a consistent growth engine.

While the expense outlook was unchanged, we did not love management’s reluctance to speak about declining expenses by the end of 2024 in the context of the core business, instead focusing on the overall basis. As Citi sells off legacy units, it should be easy for the bank to lower expenses on an absolute level. The bank still has $1.8 billion in quarterly legacy expenses—over 10% of the current expense base. Part of our thesis is that the bank will be able to lower expenses on a core basis (not just on an absolute basis) after 2024 due to selling off legacy units, and it is admittedly tough to tell exactly what the outcome may be there.

Given results largely met our expectations for the quarter, particularly on a core-franchise basis, we do not plan to make a material change to our current fair value estimate of $73 for Citi stock. Still, we admit there are several key risks to our thesis over the next half year: regulatory changes, as well as more insight into the 2024 expense outlook in fourth-quarter results.