Q4 2023 Earnings Summary
- Citi has significantly simplified its business structure, focusing on five core interconnected businesses, which enhances focus and performance and aligns the organization to its strategic vision.
- The organizational restructuring is generating substantial cost savings, with over $1 billion of run-rate saves expected by the end of the first quarter, improving efficiency and profitability.
- Citi's Services division is experiencing strong growth, with revenues up 16%, including a 19% increase in Treasury and Trade Solutions revenues (excluding Argentina), driven by client wins, innovative products, and expanding market share.
- History of Unsuccessful Restructurings: Citigroup has undergone multiple restructuring attempts in the past that have failed to deliver desired results. Analyst Michael Mayo highlighted skepticism by stating, "I count 12 restructurings at Citigroup. And I count 12 restructurings that have failed at Citigroup... The question is, why is this time different?" This history raises doubts about management's ability to execute the current restructuring plan successfully.
- Challenges in Achieving ROTCE Targets: There is skepticism regarding Citigroup's ability to meet its medium-term Return on Tangible Common Equity (ROTCE) target of 11% to 12% by 2025 or 2026. Concerns stem from historical underperformance and doubts about hitting revenue targets, especially when management acknowledges difficulties in forecasting revenues due to macroeconomic uncertainties. Analyst Ebrahim Poonawala asked, "Should we take it based on what you said today as we look into '26, getting to that 11% ROTCE, if for whatever reason, revenue falls short, you feel good about the expense flex to mitigate that headwind?"
- Underperformance in Core Business Segments: Citigroup's core businesses are underperforming, impacting overall profitability. The Banking segment reported a net loss of $322 million with a negative ROTCE of 6% for the quarter and negative 0.2% for the full year, indicating significant challenges. Mark Mason, CFO, acknowledged, "Banking reported a net loss of $322 million... ROTCE was negative 6% for the quarter. And for the full year, banking reported an ROTCE of negative 0.2% on $4.6 billion of revenue. So clearly, we have more work to do on returns." Additionally, the Wealth segment delivered low returns with an ROTCE of 0.1% for the quarter and 2.6% for the full year.
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Conviction in Achieving ROTCE Targets
Q: Why is this restructuring different? Conviction in achieving 11-12% ROTCE?
A: CEO Jane Fraser emphasized that Citi has become "finally simple," focusing on five core interconnected businesses. She expressed full commitment to transforming the company for the long term, addressing issues that have held it back in the past. Fraser acknowledged that 2024 is a critical inflection year and that management is fully accountable for delivering the 11–12% Return on Tangible Common Equity (ROTCE) by 2025 or 2026. -
Balancing Profitability and Investment
Q: How are you balancing profitability improvement with investments?
A: CFO Mark Mason stated that Citi is balancing near-term profitability with making the right long-term investments by deploying resources after growth opportunities that offer returns. They have been agile, dialing back spending when opportunities don't materialize as expected. Citi continues to invest in areas like healthcare, technology, wealth management, and Treasury and Trade Solutions (TTS) to ensure future growth. -
Capital Build and Buybacks
Q: How do you think about capital build and buybacks?
A: Mark Mason noted that Citi has been disciplined in managing capital, building over 30 basis points over the year. They aim to balance client needs with holding responsible capital levels amid uncertainties like Basel III proposals. While they want to buy back as much stock as possible given the low trading multiple, they will continue to be thoughtful and manage capital actively. -
Expense Flexibility if Revenues Fall Short
Q: If revenue falls short, can expenses be flexed to mitigate?
A: Jane Fraser affirmed confidence in achieving the 4–5% revenue growth rate but stated that if revenues come in lower due to adverse macro conditions, Citi has levers to adjust expenses accordingly. Mark Mason added that they would recalibrate expenses, particularly non-essential investments, while ensuring spending on risk and control remains. -
Downsizing Markets Business Risk
Q: Is there a risk of making the markets business too small?
A: Jane Fraser stated that there is no risk of making the markets business too small. Citi has four core markets businesses—global FX, rates, spread products, and equities—each around $4 billion in size. They are focusing on streamlining and optimizing returns without compromising their strengths and relevance in key areas. -
Buyback Outlook Beyond Quarter to Quarter
Q: When will you provide a longer-term buyback outlook?
A: Jane Fraser expressed the desire to offer a longer-term buyback outlook but emphasized the need to build credibility and wait for clarity on regulatory uncertainties like Basel III. She hopes for material revisions to regulatory proposals to avoid negative impacts on the economy and banking competitiveness. -
Transformation Spend and Benefits
Q: Has transformation spend peaked? Are benefits starting?
A: Mark Mason indicated that Citi will continue to spend whatever is needed on transformation and risk controls. While transformation investments will ultimately deliver benefits from automation and data governance, significant benefits will materialize beyond the medium term. Jane Fraser added that efficiencies from retiring legacy platforms and automating processes are beginning to build. -
Investment Banking Outlook
Q: Are you seeing an investment banking rebound?
A: Jane Fraser noted a more constructive market environment and a strong pipeline higher than pre-COVID levels. Citi expects activity to accelerate in 2024, assuming tailwinds persist. They are confident in the recovery of Debt Capital Markets (DCM) and have good momentum in healthcare and technology sectors. -
Net Interest Income and Rate Environment
Q: What rate environment is assumed in NII guidance?
A: Mark Mason stated that the NII guidance assumes 3 to 6 rate cuts in the U.S. over the course of 2024, likely back-loaded. Citi's U.S. dollar interest rate exposure is relatively neutral, with a 100 basis point parallel shift resulting in only a couple of hundred million dollars impact. -
Exposure to Russia and Argentina
Q: What is the impact of exposure to Russia and Argentina?
A: Jane Fraser explained that Citi has significantly reduced exposure in Russia, bringing net assets down to $6.5 billion and reserving 100% against remaining net assets. In Argentina, despite recent currency devaluation impacts, Citi has had less than $5 million in credit losses over a ten-year period. The firm remains committed to managing risks associated with its global business model. -
Impact of Headcount Reductions on Revenue
Q: Is revenue attrition expected from staff cuts?
A: Jane Fraser stated that no revenue attrition is expected from the reduction in force. The 5,000 roles affected are mainly managerial positions, primarily impacting functions and geographies rather than revenue-generating staff. The goal is to drive efficiency while preserving frontline productivity. -
Reaching ROTCE Targets by 2026
Q: Does "medium term" mean by 2026 for ROTCE targets?
A: In response to clarification, Mark Mason and Jane Fraser confirmed that the medium-term target of achieving 11–12% ROTCE is by 2026.