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Stock Analyst Update

Citigroup Shows Signs of Revenue Growth, Reports Strong Q2 Results; Stocks Remain Undervalued

Citigroup’s earnings are set to be quite messy for a while, and we think it is more important to ignore the noise and focus on core operations.

No-moat-rated Citigroup (C) reported excellent second-quarter earnings. Earnings per share of $2.19 came in well ahead of the FactSet consensus of $1.68 and ahead of our own estimate of $1.82. Top-line revenue came in at $19.6 billion compared with consensus of $18.4 billion, showing a relatively healthy beat all around.

Citigroup’s earnings are set to be quite messy for a while, and we think it is more important to ignore the noise and focus on core operations, which is, in fact, how we handle our projections. On this basis, results ex-legacy franchises were ahead of our expectations for net interest income, or NII, and fees, and roughly in line with our expense expectations.

As we’ve mentioned in the past, signs of growth for card balances and signs of fee growth within treasury and trade solutions, or TTS, and personal banking and wealth management, or PBWM, will be key metrics to watch as expected pressure within investment banking plays out. Management meeting its expense goals will also be key. During the quarter, expenses remained on track and full-year guidance was maintained. The bank’s TTS unit outperformed despite global economic concerns as volumes were up and rising rates helped drive NII growth. In PBWM, card balances, account acquisitions, and spending volumes were all up quarter over quarter. The wealth unit managed flat quarterly revenue growth despite headwinds from lower market levels.

Citigroup was our top pick for 2022, and the bank remains the most undervalued under our coverage, even after July 15′s large move up in stock price. We don’t plan on making a material change to our fair value estimate of $78, and our thesis remains unchanged. The bank won’t be a top performer operationally compared with peers, but it is simply too cheap, and days like July 15 show that even a hint of positive momentum leads to a closing of that valuation gap. We think additional catalysts remain as the bank winds down legacy operations and moves past consent orders.