Citigroup First Quarter Earnings: The Restructuring Is Over (NYSE:C)

I have liked the prospects of Citigroup Inc. (NYSE:C) and its CEO Michel Corbat for a quite a while now. In fact, I wrote this into my review of Citi’s 2019 performance: “I have always been a Michael Corbat fan….”

I concluded the article with the vision: “I think the future of the bank looks bright.”

My reason for this assessment:

“Michel Corbat, Citi’s Chief Executive Officer, had laid out a series of performance targets when he first came to lead the bank, and he has continually been able to produce results that met his goals.”

“Mr. Corbat and his team get kudos for the performance they turned in this past year, 2019. They have their work cut out for them in 2020.”

What an understatement about 2020!

I still think a lot of Mr. Corbat and Citigroup. The near term is clouded by a lot of uncertainty, but for the longer run, I look on this investment very positively.

First Quarter Performance

In the first quarter of 2020, Citigroup produced net income of $2.52 billion; down 46 percent from the $4.71 billion earned in the first quarter of 2019. This was achieved on revenues of $20.73 billion, which was above the revenues earned in the first quarter of 2019 of $18.58 billion.

Commenting on the bank’s performance, Mr. Corbat stated, and I agree,

“We managed our expenses with discipline and had good revenue performance as the economic shocks caused by the pandemic weren’t felt until late in the quarter.”

In other words, we really have not seen what the “economic shocks” are going to do to the economy and the bank’s performance in the near term.

Loan Loss Provision

The major difference between the two outcomes was the provision for loan losses. In the first quarter of 2020, the total provision for credit losses was $7.03 billion, up from the number one year ago of $1.98 billion.

Like the other major banks reporting this week, Citigroup is setting aside reserves in anticipation of the future. To me, this is exactly what a prudent bank should be doing at this time.

Citigroup increased its loan loss provision, by $4.92 billion, from just $278 million in the prior quarter, partly reflecting an accounting change. Of that, $2.85 billion came in the consumer bank and another $1.88 billion in the corporate bank.

At this time, the brunt of the potential loan problems is in the consumer bank. Its revenue rose 1% to $8.17 billion, but the credit costs sent it to a $754 million loss. The bank said total spending on its credit cards was flat from the year ago and down 16% from the prior quarter.

The increase in provisions for credit losses was a common factor of all the large bank reports this quarter. Note that JPMorgan Chase & Co. (NYSE:JPM) set aside $8.3 billion to credit reserves.

Michael Corbat, Citi CEO, said,

“the deteriorating economic outlook and the transition to the new Current Expected Credit Loss standard (CECL) caused us to build significant loan loss reserves. “

Return On Equity

Mr. Corbat was so proud that the bank hit its target return on tangible common equity in 2019 turning in a 12.1 percent effort. This was a very good performance, especially from where the bank was coming from. And, I believe, it points to the fact that Mr. Corbat has really done his job.

The basic numbers in the first quarter of 2020 were not that different from what was achieved in the first quarter of 2019, except for the provision for credit losses. As a consequence, the return on tangible shareholders’ equity dropped to 6.0 percent.

This number matches the results turned in by Goldman Sachs, Group Inc. (NYSE:GS) of 6.0 percent and exceeds the 5.0 return that was reported by JPMorgan.

It should also be noted that Citigroup, in terms of capital adequacy, had a CET1 capital measure of 11.2 percent, a very good number.

Balance Sheet Performance

In addition to the capital position, Mr. Corbat also argued that the bank was now “operating from position of strength from capital, liquidity and balance sheet perspective.” That is, the bank is has continued to be attractive to depositors and borrowers. It is, I believe, an indication that customers and potential customers are buying onto the Citi brand.

During the first quarter, Citigroup reported significant increases in both deposits and loans, which rose by 15 percent and 6 percent, respectively.

In addition, the bank said corporate clients had drawn down their credit lines by $25 billion in the quarter. While provisions rose sharply, actual credit losses rose by just 8 percent from the year before, to $2.1 billion.

Dividends and Other Things

Mr. Corbat has been very adamant in public comments that Citigroup will not suspend its dividend payouts. For the time being, I believe that this is the best position for Citigroup, as well as for the other large US banks. But, depending upon the severity and length of any economic downturn, Citigroup must be flexible and consider that it might, at some time in the future, suspend its dividends.

In addition, like all the other large commercial banks, Citigroup has stopped stock buybacks for the time being.

Furthermore, Citigroup is committed, as are the other large banks, to supporting businesses and individuals through this very difficult period of economic stress. They have, in their reporting and discussions stated what these various initiatives might be.


Mr. Corbat ended the bank’s first quarter report with these words,

“COVID-19 is a public health crisis with severe economic ramifications. All of the work we have done in recent years has put us in a very strong position from a capital, liquidity and balance sheet perspective. While no one knows the severity or longevity of the virus’ impact on the global economy, we have the resources we need to serve our clients without jeopardizing our safety and soundness.”

I believe in Mr. Corbat, and I believe in Citigroup. Citi, for the longer term is, in my mind, certainly something an investor should keep their eyes on. For existing shareholders, the bank is certainly a “hold.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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