Citigroup (C 1.35%) has long been a problematic stock for investors to analyze. While it's a large U.S. bank, it is hard to put a label on it. It runs an investment banking and trading operation and a U.S. deposit and lending franchise, but it's not the dominant player in either category. The bank is building out wealth management but still has some work to do. Citigroup is also extremely global, which adds to its complexity regarding how its business is affected by various interest rates and central banks.
However, if investors are trying to understand the investment case for the bank other than its discounted price and strong dividend, they should take a look at one particularly critical business unit. Here's why.
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Treasury and Trade Solutions
Citigroup's CEO Jane Fraser often refers to Citigroup's Treasury and Trade Solutions (TTS) as the "crown jewel" of the bank.
TTS is a subsidiary of Citigroup that helps businesses operate globally by providing a range of cash management and liquidity services. TTS enables clients to move money in 140 different currencies and connects to 270 clearing systems. This is huge for global companies that want to do things like pay their suppliers in other countries or take in money from international customers. TTS helped Google, a subsidiary of Alphabet, build its internal banking operations several years ago.
In 2021, TTS made up more than 21% of Citigroup's total revenue. The business is also extremely helpful when it comes to deposit gathering and loan growth. TTS accounted for about half of the bank's $1.3 trillion deposits at the end of the second quarter of this year. In 2021, TTS accounted for more than 13% of Citigroup's net interest income (NII), which is the profit banks make on loans, securities, and cash after funding those assets. And between 2017 and 2021, TTS averaged a strong roughly 22% return on tangible common equity.
The best quarter in a decade
In its recently reported second-quarter results, Fraser said TTS "fired on all cylinders as clients took advantage of our global network, leading to the best quarter this business has had in a decade."
TTS generated revenue of more than $3 billion, which is up 17% from the first quarter of the year and 33% year over year. On the company's recent earnings call, CFO Mark Mason said TTS saw good growth in mid- and large-corporate clients. He also said the business continues to "see healthy underlying drivers," with U.S. dollar clearing volumes up 2% year over year, cross-border flow up 17%, and commercial card volumes up 61%. NII grew 42%.
TTS benefits from rising interest rates, which Fraser said drove about a third of the strong performance during the quarter. At Citigroup's investor day, management guided for TTS revenue to grow at a compound annual growth rate in the high single-digit percentage range in the medium term. So, while rising rates are helpful, this is still a great business on its own with solid growth prospects.
Why TTS is critical for Citigroup
As Mason said on the earnings call, "The TTS franchise is core to our business." Not only does it support the operations of large corporations in more than 90 countries, but it is the main differentiator from the bank's peers. TTS also helps drum up business in other divisions of the bank, such as its capital markets business.
TTS drives a lot of deposit growth, high returns on capital, and cross-selling activity, and is a big differentiator for the bank. It's a key reason I think investors should look at Citigroup, which is in transformation mode, trades at a bargain stock price, and offers a very good dividend.
