It’s been one year since Jane Fraser made her first big strategic moves as Citigroup’s CEO, and what was already a challenging environment has become even more difficult in recent months.
U.S. inflation is the highest it’s been in four decades, and interest rates are expected to soar and could dampen loan demand. Meanwhile, Russia’s war in Ukraine has created economic uncertainty across the world, which in many sectors is still grappling with a pandemic that’s in its third year.
Citi’s first-quarter earnings report reflected some of those challenges — total revenues were down, expenses were up, and the company set aside $1.9 billion in credit reserves to help shield against direct and indirect exposures in Russia. Those factors drove the $2.4 trillion-asset global bank’s net income down 46% from the same quarter last year.
But behind the negative headline numbers, the company appears to be on target with its efforts to simplify operations and focus on high-performing businesses to deliver larger shareholder returns.
Ten of the 13 overseas consumer franchises that were put up for sale a year ago have either found buyers or will be wound down by Citi, while the company’s exit from retail banking in Mexico, which was announced in January, is moving forward with “very preliminary” talks with potential buyers, Fraser told analysts Thursday during the bank’s first-quarter earnings call.
At the same time, the bank continues to hire commercial and investment bankers and client advisors as well as invest in new technology for its treasury services, wealth management, cards and other businesses, Chief Financial Officer Mark Mason said.
And it remains laser-focused on overhauling its risk management and internal controls infrastructure, which came under fire in the fall of 2020 when the Federal Reserve and the Office of the Comptroller of the Currency issued consent orders after identifying certain “deficiencies” in the system. The OCC also imposed a $400 million civil money penalty.
On Thursday, Fraser pointed to the progress being made in both offloading the overseas franchises, which Citi says are too small to compete effectively, and upgrading and investing in the risk management infrastructure.
“If there’s any comfort from our numbers, [it’s that] we’re getting on with it,” Fraser said. “We’re not hanging around here.”
For the quarter, Citi reported total revenues of $19.2 billion, down 2% year over year due in part to a 43% slide in investment banking fees, which fell amid the contraction of capital markets over the past two months. Expenses rose to $13.2 billion, an increase of 15% from the year-earlier period, or 10% excluding costs related to the company’s sale of consumer franchises in Asia.
The uptick in expenses was not unexpected. During an investor day in March, the $2.4 trillion-asset company warned investors that costs in the first quarter would rise 10-12%, excluding any impact from the divestitures of certain consumer businesses.
On Thursday,Mason stood firm on the guidance he gave last month on full-year revenues and expenses, saying revenue growth should be in the low-single-digit range while expenses should come in at the mid-single-digit range. Analyst Steven Chubak of Wolfe Research wondered why the bank did not revise upward its revenue projection, given the number of interest rate hikes that are presumed to take place this year.
The “puts and takes that have played through the quarter” are one factor as is the fact that “there’s still a fair amount of uncertainty that’s out there,” Mason said.
“So while there have been increases as it relates to rates and we’ve seen and expect to see some benefit play through for that, there’s also been an impact on banking revenues as we see the uncertainty creating a dynamic where corporate clients are pausing, particularly as it relates to equity capital markets and debt capital markets,” Mason said. “There are offsets that play out and so we felt comfortable kind of maintaining the guidance on the revenue top line.”
Unlike JPMorgan Chase, which added loan-loss reserves for the first time in two years, Citi’s recorded a moderate net reserve release of $612 million. Cost of credit totaled $755 million.
Net interest income was $10.9 million for the quarter, an increase of 3% from the year-earlier period. Earnings per share were $2.02, beating the average estimate of analysts polled by FactSet Research Systems by 59 cents.
Much of Citi’s business strategy revamp stems from longtime investor pressure on the company to achieve higher shareholder returns, which have lagged its big-bank peers. Citi’s return on tangible common equity was 10.5% for the quarter, compared with JPMorgan’s 16%.
While one analyst on the call said Citi’s expenses were high, another said the bank appears to be “making steady progress” on what it committed to at the investor day.
“There are higher expenses, but .. asset-quality metrics remain strong, and [we welcome] a more simplified organization,” Michael McTamney of DBRS Morningstar said in an interview.
While Cit’s approach so far seems right, there’s a lot left on the to-do list, McTamney said.
“They seem to be heading in the right direction, but time will tell,” he said.
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