Citigroup (C 1.41%) delivered its much-anticipated Investor Day detailing its longer-term strategic vision for how to get the faltering bank back on track. Unfortunately for investors like myself who were hoping it could serve as a near-term catalyst, Investor Day came across as underwhelming. The bank set financial targets that left much to be desired and could take a while to achieve. It also looks like some of the regulatory issues and tech modernization efforts at the bank are going to take several years to work through and pay off.
Not closing the gap with peers
What investors and analysts were looking for at Investor Day were long-term financial targets. The big one is the return on tangible common equity (ROTCE), which measures how much profit a bank made on shareholder capital, not including goodwill, intangible assets, and preferred equity. Citigroup's ROTCE has struggled to keep pace with peers in recent years. Between 2017 and 2021, Citigroup averaged a ROTCE of 10.2% compared to a peer average of roughly 13%.
Image source: Getty Images
Citigroup said at the Investor Day that it believes it will generate an 11% to 12% ROTCE over a medium-term time horizon, which means the next three to five years. Everyone was hoping for higher aspirations as it seems like this target will hardly narrow the gap with peers, which have set much higher medium- and long-term ROTCE targets.
| Bank | ROTCE Target | Time Horizon |
|---|---|---|
| Citigroup | 11%-12% | Medium-term |
| Wells Fargo (WFC -0.03%) | 15% | Long-term |
| Bank of America (BAC -0.21%) | 15% | Medium-term |
| JPMorgan Chase (JPM 0.06%) | 17% | Medium-term |
| Goldman Sachs (GS 1.79%) | 15%-17% | Medium-term |
| Morgan Stanley (MS 0.29%) | 20% | Long-term |
Source: Financial statements, earnings calls.
There's a little bit of discrepancy on the timeline for each bank, but again Citigroup hardly looks like it's closing the gap -- if anything the gap could widen. Even for the banks that had longer-term targets, Morgan Stanley already hit a 20% ROTCE in 2021, and Wells Fargo is operating under an asset cap limiting balance-sheet growth, which is likely the most punitive regulatory consent order in all of banking. If the cap gets lifted in the next year or two, Wells Fargo may move its financial targets up.
The other thing is that Citigroup also disclosed the revenue growth rates it expects in its various business divisions that would drive its 11% to 12% ROTCE target.
Image source: Citigroup investor presentation.
As you can see in the right column, the bank is projecting compounded annual growth rates in every division but markets and banking in the high-single-digit percentage range, with wealth management having the potential to reach a CAGR in the low-teens-percentage range. I was hoping maybe Citigroup was low-balling ROTCE targets with the intention to beat and raise -- and maybe it still is -- but these revenue CAGRs don't strike me as conservative.
The issue is that Citigroup will create some revenue holes by selling all of its international consumer banking divisions, particularly as it relates to Banamex in Mexico. Furthermore, total expenses rose 9% in 2021 and now are slated to rise another 7% or 8% this year when you exclude costs associated with the divestitures in Asia. Management did not say that correcting regulatory issues and modernizing its data and tech systems would be an easy journey, but it certainly comes across as a bit lengthier and more expensive than I had thought.
Disappointing but realistic
The one silver lining from Investor Day is that the targets detailed by management at least seem realistic, even if investors had hoped for more. Longtime bank analyst and Citigroup critic Mike Mayo even said he doesn't think he's ever heard Citigroup use the words "failed" and "underperformed" more than at Investor Day. Management also provided a full set of key performance indicators (KPIs) for investors and analysts to track the company's progress and hold management accountable.
I'm certainly disappointed by the ROTCE targets and can acknowledge the bull case for Citigroup will likely take much longer to play out and may not have as much upside as I had initially thought. However, I still think Citigroup could have some near-term upside, largely because it trades at a mere 75% of tangible book value, which essentially measures a bank's net worth.
Despite its issues, given the unique global scale of Citigroup and the high potential of some of its business divisions, I don't think it should trade at a discount to tangible book value (JPMorgan and Bank of America have recently traded at about 200% of TBV). I think investors have given the bank this valuation purely as a rebuke after so many unfulfilled promises and years and years of underperformance.
Perhaps shareholders might come around a little to the fact that management has taken responsibility and set a very clear plan into action. I'm happy to continue to hold the Citigroup shares I purchased in my retirement account for a while and collect the 3.5% dividend yield for now. I am much less optimistic about the 2024 call options I purchased. But again, I could see shareholders easing up on the bank and perhaps getting the stock back or closer to tangible book value if management shows some signs of executing in coming quarters.
