{"id":45262,"date":"2023-08-07T01:13:29","date_gmt":"2023-08-07T05:13:29","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/citigroup-bull-thesis-delayed-but-not-aborted-nysec\/"},"modified":"2023-08-07T01:13:31","modified_gmt":"2023-08-07T05:13:31","slug":"citigroup-bull-thesis-delayed-but-not-aborted-nysec","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=45262","title":{"rendered":"Citigroup: Bull Thesis Delayed But Not Aborted (NYSE:C)"},"content":{"rendered":"
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In my prior article on Citigroup (NYSE:C<\/span>), I set out my thesis where I anticipated the stock would be up by 100% by the end of 2024. This article is an update to my bull thesis on Citigroup. I still believe that the thesis will still play out broadly as expected, however, now I expect the timelines to be by the end of 2025 as opposed to 2024, given recent setbacks.<\/span><\/p>\n

In my prior article, I also set out the key risks to my thesis being (1) higher than expected capital requirements and (2) delay in the sale of Banamex Mexico.<\/p>\n

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The second key risk is the target capital ratio. A key part of the thesis is the ability of Citi to return capital to shareholders. The risk of a higher capital ratio for Citi may manifest if it doesn’t perform as expected in the Fed’s stress tests and\/or regulators will increase the capital requirements of the large U.S. banks. Additionally, a suspension or major delay in the sale of Banamex Mexico will also be negative for Citi.<\/span><\/p>\n<\/blockquote>\n

Unfortunately, both risks have manifested and these are material short-term setbacks for the stock but more on this later.<\/p>\n

The Fed Stress Test (otherwise known as “CCAR”)<\/h2>\n

Citigroup’s CCAR results were disappointing especially when compared to peers and Citi’s CEO Jane also expressed her frustration. As a result of the 2023 CCAR, Citi’s Stress Capital Buffer (“SCB”) has increased by 30 basis points translating to a higher (13.3%) target capital ratio for Citi. Whilst not a worst-case scenario (i.e. capital ratios could have increased more than 0.3%), it dashed hopes of outsized share buybacks in the near term.<\/p>\n

As can be seen below, the culprit for the underperformance has been Pre Provision Net Revenue projections:<\/p>\n

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Federal Reserve Website<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

As can be seen from above, Citigroup’s PPNR to Provisions for loan losses is ~52%, whereas JPMorgan (JPM), as an example is 91%.<\/p>\n

In the 2022 CCAR results, Citi performed much better on a relative basis where the above ratio was 75% compared to JPM with a ratio of ~83%.<\/p>\n

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Federal Reserve Website<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

It is unclear what has driven the divergence between the 2023 and 2022 CCAR results, as always, the Fed’s model tends to literally be a “black box”. Evidently, Citigroup was also puzzled by the low PPNR and especially the non-interest-line as disclosed in its CCAR press release:<\/p>\n

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Citi also announced that it has initiated dialogue with the Federal Reserve to understand differences in Non-Interest Income (Non-Interest Revenue per Citi\u2019s Financial Reporting presentation) over the nine-quarter stress period between the Federal Reserve\u2019s CCAR results and Citi\u2019s Dodd-Frank Act Stress Test results.<\/p>\n<\/blockquote>\n

It appears that the underperformance, under the Fed’s 2023 CCAR models, is largely attributed to fee income in Citi’s FICC trading businesses.<\/p>\n

Proposal To Increase Large Banks’ Capital Buffers<\/h2>\n

Another headwind is the proposed rules by the Fed, led by the Federal Reserve’s top banking regulator, Michael Barrett is estimated to increase capital requirements by a massive 19%. The proposals were released in July and include increases to risk-weighted assets to products such as mortgages and government bonds. The Fed is proposing a standardized approach to assess a “floor” for the credit, operational, and trading risks of large banks, rather than allowing the large banks to rely on internal models. The proposal is out for consultation and is expected to be implemented in 2025.<\/p>\n

There are several potential mitigants, however, including:<\/p>\n