Restructuring to take time and investor confidence
- 3Q23 revenue and net profit surpass estimates on higher net interest income and outperformance in several business segments
- Management raised full-year net interest income guidance as it continues to benefit from higher interest rates
- We remain watchful on execution of its biggest restructuring in decades
Encouraging 3Q23 revenue and net profit beat. Total revenues grew 9% y-o-y/4% q-o-q to US$20.1bn, above consensus estimates of US$19.3bn. The outperformance was primarily attributable to higher net interest income (+10% y-o-y/-1% q-o-q), treasury and trade solutions revenue (+12% y-o-y/+2% q-o-q), investment banking revenue (+34% y-o-y/+38% q-o-q) and fixed income markets revenue (+14% y-o-y/+1% q-o-q), partially mitigated by lower revenue from exited markets and wind-downs. Net profit increased 2% y-o-y/22% q-o-q to US$3.5bn and adjusted earnings per share of US$1.52 came in ahead of consensus estimates of US$1.21, with expenses up 6% y-o-y but flat q-o-q. Credit costs of US$1.8bn (+35% y-o-y/+1% q-o-q) continued to be driven by a normalisation in non-conforming loans for credit cards on top of a continued building of reserves due to card balance growth. CET1 ratio of 13.5% is above regulatory requirement of 12.3% (increased due to higher stress capital buffer of 4.3% from 4.0%) and medium-term target of 11.5-12.0%, after returning c.US$1.5bn to shareholders through common dividends and share buybacks. Loans grew 3% y-o-y/1% q-o-q to US$666bn while deposits declined 3% y-o-y/4% q-o-q to US$1.3tr.
Updates on ongoing restructuring; management raised full-year net interest income guidance. Citi is targeting an organisational simplification and has eliminated over 15% of the regional and functional roles at the top 2 layers of management in the past month, with more changes to come by mid-November before concluding by early next year. Updates on wind-downs: 1) closed the sale of Taiwan consumer business in 3Q23; 2) announced the sale of consumer wealth portfolio in China to HSBC in Oct-23; 3) expect to close sale of Indonesian consumer business in 4Q23; 4) restarted sales process in Poland; and 5) on track to separate Mexico business in 2024 and IPO in 2025. Management raised guidance for full-year net interest income (excluding Markets) to US$47.5+bn from US$46bn, though full-year revenue (excluding divestiture-related impacts) guidance of US$78-79bn was maintained. We continue to remain watchful on the execution of its massive restructuring across multiple management layers and business units and believe it could take an extended period of time before intended operational efficiencies come through.