Investments In Technology And Partnerships With Apollo And Mastercard Will Streamline Operations

Key Takeaways

• Citi's diversification in fee-based revenues and strategic partnerships boosts growth and expands revenue without balance sheet risks.
  
• Investment in technology and share repurchases enhance operational efficiency and support EPS growth.
  
• Economic challenges, increased credit costs, and compliance issues may negatively impact Citigroup's revenue growth, net margins, and overall profitability.

Catalysts

A diversified financial service holding company, provides various financial product and services to consumers, corporations, governments, and institutions worldwide.

• Citi is experiencing double-digit growth in fee-based revenues, driven by increased client investments and flows, particularly in Wealth Management, which is contributing to a more diversified earnings mix and enhanced revenue growth.
  
• The integration of cross-border services with Mastercard Move positions Citi to expand its Secure Services products, potentially increasing transaction volumes and future revenue streams.
  
• Citi's strategic partnership with Apollo in private credit enhances its ability to source new transactions, providing an additional revenue stream without using its balance sheet, thus potentially boosting earnings growth.
  
• Continued investment in technology infrastructure and application modernization aims to streamline operations, potentially reducing costs and improving net margins through increased efficiencies.
  
• Ongoing share repurchases, which totaled $1 billion in the last quarter, are expected to continue and support EPS growth by reducing the number of shares outstanding.

Citigroup Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Citigroup's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $20.7 billion (and earnings per share of $9.27) by about December 2027, up from $6.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2027 earnings, down from 20.1x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 5.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Citigroup Future Earnings Per Share Growth

Risks

• Economic challenges in key markets like China and Europe, where consumer sentiment and structural competitiveness issues persist, could negatively impact revenue growth and net margins.
  
• Weakness in Citigroup’s fixed income markets, specifically a 6% decline due to underperformance in the rates and currencies businesses, could lead to pressures on earnings.
  
• Elevated credit costs in the cards portfolio, with increasing delinquencies and net credit losses, might impact net margins and earnings if consumer credit quality continues to deteriorate.
  
• Persistent inflation and high interest rates are affecting retail services, potentially leading to increased credit risk and impacting revenue growth and net margins.
  
• Compliance and regulatory issues, including delays in data quality management, could lead to increased costs and operational challenges, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of $80.25 for Citigroup based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $66.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $88.0 billion, earnings will come to $20.7 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of $71.12, the analyst's price target of $80.25 is 11.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.