Why Citi’s results could turn inside-out in the second half of 2023

While strong revenue growth in Citigroup’s giant credit card portfolio helped the New York bank to overcome headwinds in wealth management and investment banking during the second quarter, the script could flip going forward.

Chief Financial Officer Mark Mason spoke Friday about a number of encouraging signs in the wealth business — and even a few modest “green shoots” in the hard-pressed investment banking sector. At the same time, he predicted that card-related losses will continue to creep up toward their historical norms.

Citi reported quarterly credit card revenue of just under $4 billion, up a strong 15% year over year, on card loans of $153 billion.

Meanwhile, the net credit loss rate in the bank’s branded cards business stood at 2.47% as of June 30. For its retail services unit, which offers store-branded credit cards, the same metric was 4.46%. While both numbers have been ticking up, they remain substantially below their historical averages.

But if you fast forward six months, that will likely no longer be the case. Historically in Citi’s branded cards business, the average net credit loss rate ranged from 3%-3.15%, while in its retail services business, the average loss rate ranged from 5%-5.5%.

“We still expect for both portfolios to hit those normal levels some time at the end of the year,” Mason said on a conference call with investment analysts.

To date, the most significant downdraft has come from borrowers with lower FICO scores. “We don’t have a large number…in our portfolio, but that is where we’re seeing more of the normalization happening on the payment rates,” CEO Jane Fraser said on the conference call. 

Meanwhile, headwinds in the broader economy slowed the bank’s wealth and investment banking business lines during the second quarter.

Citi’s wealth business generated revenues of $1.8 billion, down 5% year over year. An effort unveiled by Citi in 2022 to generate more income from its wealth unit has yet to yield fruit; in the first quarter, global wealth management revenues declined by 9%.

But Fraser pointed to a number of positive indicators, including increased activity in Asia. The U.S. retail banking network generated 25,000 wealth referrals between January and May — up 18% over the same period in 2022 — she noted.

“That gives us the opportunity to do more with those clients,” Mason said, adding that he believes Citi’s wealth business has “positive prospects for the balance of the year and through the medium term.”

Investment banking remains a significant drag on Citi’s overall numbers, with second-quarter revenue declining 24% year over year to $612 million. “The long-awaited rebound in investment banking has yet to materialize,” Fraser said. She called the results “disappointing.”

The drop-off prompted the $2.4 trillion-asset company to scale back the size of its investment banking operation, which led to $120 million in severance expenses. Still, amidst the general gloom in investment banking, revenue generated by debt capital markets rose 6%, Mason said.

Overall, Citigroup reported quarterly net income totaling $2.9 billion, which worked out to $1.33 a share, three cents above analysts’ consensus expectations. Likewise, total revenues of $19.4 billion edged past analysts’ $19.3 billion forecast.

Gerard Cassidy, an analyst at RBC Capital Markets who covers Citi, said that improved asset quality was a primary factor in the company’s stronger than expected earnings.

Nonperforming assets totaled 0.76% of loans, which was better than Cassidy’s 0.89% estimate. And the company’s second-quarter provision of $1.82 billion was significantly below the consensus estimate of $2 billion, he said.

Citi’s provision was also down from the first-quarter level of $1.975 billion. That positive trend set Citi apart from fellow industry titans JPMorgan Chase and Wells Fargo, both of which added to their reserves, citing concerns about commercial real estate loans.

Peter Nerby, a senior vice president at Moody’s Investors Service, took a generally positive view of Citi’s second quarter results, highlighting its strong capital levels and solid asset quality ratios.

“These factors remain key pillars underpinning Citi’s creditworthiness as it continues to transform into a simpler, sounder bank,” Nerby said in a statement.

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