After a pause last year, the large banks JPMorgan Chase and Wells Fargo announced in their recent earnings calls that they are planning to resume share repurchases in the current quarter.
Share repurchases are a big reason investors buy big bank stocks, so it's never good to see large banks not buying back shares.
But despite the moves of its peers and having built significant levels of capital in the fourth quarter, Citigroup (C 3.06%) said that it is still not planning to repurchase shares in the first quarter, much to the chagrin of frustrated analysts and investors. Let's take a look at why this is the case and when Citigroup may be able to resume share repurchases.
The bank did a good job of building capital
Several large banks had to pause share repurchases last year as they prepared for higher regulatory capital requirements this year and potentially in 2024.
Image source: Getty Images.
Regulatory capital requirements change year to year based on annual stress tests conducted by the Federal Reserve, and regulatory capital rules have more or less been in limbo since the Great Recession. For instance, banks are still waiting on the Basel Committee on Banking Supervision, an international body that leads the charge on bank regulation, to finalize capital rules, which is expected to happen soon.
A good way to measure a bank's regulatory capital is by looking at its common equity tier 1 (CET1) capital ratio, which measures a bank's core capital expressed as a percentage of total risk-weighted assets such as loans. If banks have capital that exceeds their regulatory requirement, this can be returned to shareholders in the form of dividends or share buybacks.
At the end of the third quarter of 2022, Citigroup had a CET1 ratio of 12.3%, a ratio that rose to 13% in the fourth quarter -- and well above its required level of 11.5%. The bank had previously said it hadn't expected to get to this level until the second or third quarter of this year, so it was certainly a nice surprise to see the bank hit this number earlier than expected.
Citigroup achieved this by attacking both the numerator and denominator of the CET1. It increased cash and safer investments in the quarter, reduced trading-related assets, and increased capital.
Oh, Mexico
Not only did Citigroup reach its CET1 target ahead of schedule, which includes a 1% internal management buffer, but the bank said its mid-year CET1 target is 13% and its medium-term target for the CET1 target is 11.5% to 12%. But the bank is still not repurchasing shares in the quarter, so what gives?
Well, Citigroup is in the process of a multiyear transformation after consistently lagging returns. A big part of this transformation is the planned exit or sale of 14 of its international consumer banking operations, including its very profitable unit in Mexico called Citibanamex. The sale of this consumer banking business, in particular, is very complex because it's one of the largest banks in Mexico, so Citigroup will need to work closely with the Mexican government.
As has been discussed previously, when Citigroup eventually completes the sale of Citibanamex there's going to be a temporary negative impact on the CET1 ratio due to a currency translation adjustment accounting rule.
So, the bank needs to keep higher capital levels until the transaction goes through. But with Citigroup currently trading at such a discount to its tangible book value or net worth, this would also be the most opportune time for the bank to repurchase shares.
Investors and analysts have been frustrated with Citigroup's poor performance in recent years and have started to run out of patience, as was evidenced by Wells Fargo analyst Mike Mayo's comments on Citigroup's fourth-quarter earnings call.
"So, I'm just thinking like don't sell Banamex, don't have that temporary capital hit, start buying back stock at a fraction of your tangible book value," Mayo said.
When will the bank resume share repurchases?
Citigroup has struggled for years, so fixing the bank is not going to happen overnight. Management believes the best path for long-term value creation is selling its international consumer banking business, which will make the bank simpler and hopefully lead to lower regulatory capital requirements in the future.
In the near term, the stock could continue to struggle. But if it can get clarity on the new Basel rules and further understand the capital hit from Mexico -- and also get that sale done as soon as possible -- it should be able to start repurchasing shares.
It may even be able to begin as soon as the second quarter, given the strong capital position it is already in. It may not be a huge repurchase at first, but anything would be great given where the bank trades.
