Improved Profitability at Citigroup

Narrow-moat-rated Citigroup C reported decent third-quarter results, with the bank turning in a return on tangible equity of 12%, putting Citi on solid footing to meet its full year goal of 12%. Net income came in at $4.9 billion, or $2.07 per share, on $18.57 billion of revenue. Revenue growth of 1%, along with an increase in operating expenses of 1% led to roughly stable operating income. Credit costs did increase 6% during the quarter, causing earnings before taxes to decline 1%. Despite this, a lower tax rate helped drive net income growth of 6%, while share repurchases brought EPS growth to 20%. As we update our projections, we do not plan to make material changes to our current fair value estimate of $80.

The bank updated parts of its guidance, with management expecting pressure on net interest income due to the rate environment; however, management also expects stronger than originally planned for fee income growth to offset this, leading to roughly the same net revenue results originally guided for. While management did not officially begin to back off of its original guidance for a return on tangible equity of 13.5% in 2020, they did admit they will need to reevaluate this target as they go through the current, year-end budgeting process. This is understandable, given the worsening rate environment, which is not under management's control, and we would not be surprised to see this target lowered when updated guidance is given for 2020.

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