Citigroup’s transformation is heading in the right direction, but it did hit a snag this week.
Citigroup (NYSE:C) reported strong second quarter results Friday, with earnings rising 10% year-over-year thanks to a successful effort to reduce expenses.
However, despite the better-than-expected earnings and revenue numbers, the share price was down as much as 4% on Friday to a low of $63.35 before bouncing back over $64 per share in the early afternoon. But it was still down about 2% on the day.
So, what caused the bank’s stock to fall despite its solid earnings?
Cost-cutting initiative boosts earnings
Citigroup, the nation’s fourth largest bank, had solid if not spectacular, revenue numbers in Q2. Turnover climbed 4% year-over-year to $20.1 billion but was down 5% compared to Q1. This was slightly better than analysts had anticipated, as they estimated $20 billion in revenue.
However, Citigroup got a $400 million one-time revenue boost from cashing out a share exchange offer with Visa (NYSE:V).
Citigroup posted year-over-year revenue gains in all of its businesses, led by banking, where revenue climbed 38% to $1.6 billion. Investment banking was a bright spot, as revenue surged 60% year-over-year to $853 million. Personal banking was also up, rising 6% to $4.9 billion. Markets, its institutional trading arm, also saw a 6% revenue increase.
Net income soared 10% year-over-year in the quarter to $3.2 billion, or $1.52 per share, which exceeded estimates to $1.39 per share. However, net income was down 5% from Q1.
Earnings spiked due to Citigroup’s expense reduction initiative, which CEO Jane Fraser announced last year to reorganize and streamline operations. It resulted in a 2% year-over-year expense decrease to $13.3 billion and a 6% reduction from Q1.
“We have made an incredible amount of progress in simplification — both strategically and organizationally,” said Fraser.
Fined by federal regulators
When she took over as CEO in 2021, one of Fraser’s goals was to improve Citigroup’s internal controls and risk management processes. Under the previous leadership, Citigroup had been fined about $400 million by the Office of the Comptroller of the Currency for unsafe and unsound risk management practices.
The firm subsequently announced a $1 billion initiative to modernize and improve its internal controls, which was part of Fraser’s reorganization plan.
However, it appears that the remediation plans have not proceeded fast enough, as the bank got hit earlier this week with $136 million in additional fines from the OCC and the Federal Reserve Board.
The regulators said Citigroup “failed to meet remediation milestones and make sufficient and sustainable progress towards compliance” with the OCC’s order from 2020.
“While the bank’s board and management have made meaningful progress overall, including taking necessary steps to simplify the bank, certain persistent weaknesses remain, in particular with regard to data,” Acting Comptroller of the Currency Michael Hsu.
The OCC is calling on the bank to refocus its efforts on take the necessary corrective actions.
In a statement, Fraser acknowledged that there are areas where they have not made fast enough progress.
“We’ve intensified our focus and increased our investment in those areas over the last several months. We will get these areas where they need to be, as we have done in other areas of the Transformation. As we’ve said from the beginning of this multi-year effort, we’re committed to spending what is necessary to address our consent orders,” Fraser said in a statement.
Is Citigroup a buy?
The risk management issues damaged an overall solid earnings report and caused the share price to drop on Friday. The news likely shattered the confidence of some investors that, perhaps, the transformation was not on track.
While this is a setback, Citigroup has made solid progress and seems to be headed in the right direction, perhaps more slowly than anticipated. But Fraser had a massive vessel to turn around, so it certainly takes time.
The stock is up 25% YTD and I still like where it is headed. It is trading below book value and has a forward P/E of 11. I think it’s a solid buy for investors looking for a good value stock with an excellent dividend. Although, that assumes it fixes its internal controls to the satisfaction of regulators.
