Citigroup Earnings: Undervalued Citi Keeps Revenue Intact, and Our Thesis Is Unchanged

Citigroup Stock at a Glance

Current Morningstar Fair Value Estimate: $75

Stock Star Rating: 5 Stars

Economic Moat Rating: None

Moat Trend Rating: Stable

Citigroup Earnings Update

No-moat-rated Citigroup C was our top pick at the start of 2022 and remains one of the more undervalued banks under our coverage in 2023. First-quarter results supported our multistep thesis for the name as the overall revenue and expense outlooks remained unchanged, the bank sold off additional business units, and first-quarter results were even better than we expected.

Going into the quarter, we felt that the largest banks would be fine. While profitability would face some pressure in the short term, in the longer term it would not be destroyed. With no major disappointments, and with the bank seeming to handle the current turmoil just fine, we do not plan on making a material change to our fair value estimate of $75, barring any surprises on the upcoming earnings call.

Citi Stock Undervalued

We continue to view Citigroup as an undervalued stock with idiosyncratic catalysts that could help unlock value over the next several years.

First-quarter adjusted earnings per share of $1.86 came in ahead of the FactSet consensus of $1.65 and just ahead of our own estimate of $1.76. The primary difference with our own estimate was a 4% beat on net interest income, or NII, and a 4% beat on expenses.

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 and the bank’s key targets. Here, the bank’s core (ex-legacy) operations showed slight growth in NII, solid overall performance within the ICG services group, and expenses that are just beginning to approach run rates that we hope the bank can hold the line on. We think the bank will need a turnaround in several of its key fee categories to meet medium-term revenue growth targets, and we also have some worries about how ICG services revenue will respond if rates are eventually cut, but otherwise most other targets seem on track for now.