Analysis: C

Monday morning before the opening bell, Citigroup (C) reported a top and bottom-line beat with its second-quarter 2019 earnings results. Revenue of $18.758 billion (up 1.5% year over year) beat the $18.495 billion consensus and earnings per share of $1.95 (up about 20% year over year) topped the consensus of $1.81, though we do note Citi's true earnings per share number is really $1.83 after we back out a gain related to its investment Tradweb.

Looking to several key bank-wide metrics, Citi's net interest revenue as a percent of average interest-earning assets (net interest margin or "NIM") was 2.67%, slightly below expectations of 2.71% and down three basis points year over year and five basis points from the first quarter. However, total net interest revenue increased about $230 million sequentially, and on a net interest revenue per day (constant currency) measure, the bank's result of $131.3 million increased approximately 4% year over year and nearly 1% sequentially.

Overall expense control was great in the quarter as Citigroup reported an efficiency ratio (operating expenses/revenue) of 56% (down an impressive two percentage points year over year and representing 11 straight quarters of improvement), a much better than expected result against expectations of 57.3% (recall lower is better as it essentially indicates the cost of revenue).

Return on tangible common equity (RoTCE) came in at 11.9%, which was about 0.7 percentage points above some of the estimates we saw. We note this rate is still slightly below management's goal for the fiscal year of 12%, but management is knocking right on its doorstep. When management spoke on the conference call, they reiterated their goal of 13.5% RoTCE in 2020, however, the consensus continues to fail to reflect this expectation.

Meanwhile, the bank's common equity tier 1 (CET1) ratio, which compares core equity capital to total risk-weighted assets and is a measure of financial strength, also came in at 11.9% and that is about 0.1% above expectations and unchanged from the prior quarter. This is a healthy number and should continue to give management the ability to return a large amount of capital to shareholders through dividends and buybacks. In the second quarter, Citigroup repurchased 54 million shares and returned a total of $4.6 billion to shareholders via dividends and buybacks. We note that the bank plans to return $21.5 billion of capital over the next four quarters through dividends and a $17.5 billion buyback. This will increase Citigroup's three-year capital return total to $62.3 billion, topping the at least $60 billion goal Citigroup set at a previous Investor Day.

Additionally, the bank's tangible book value per share (TBVPS), which is a measure of book value less goodwill and other intangible assets, came in at $67.64, above expectations of $66.67 and up from $65.55 from the prior quarter.

By segment, Global Consumer Banking (GCB) revenue was $8.505 billion (+4% YoY), about in line with the $8.582 billion consensus. Importantly, Citigroup once again showed growth in every region. Institutional Clients Group (ICG) revenue was $9.796 billion (+1% YoY), in line with the $9.729 billion consensus. Lastly, Corporate/Other revenue was $532 million (+1% YoY), a small beat of the $516 million consensus.

In GCB North America, revenue was $5.185 billion for an increase of 3% YoY. Retail Banking revenues were $1.351 billion, flat YoY. Excluding mortgage, Retail Banking revenues increased 1% on improved growth in deposit volumes that was partially offset by lower spreads. Branded Cards reported revenue of $2.2 billion, a strong increase of 7% YoY that was driven by continued growth in interest earnings balances. Brand Cards Average Loans and Purchase Sales increased YoY by 2% and 8%, respectively. That healthy Card purchase sales growth represents about a 150-basis point acceleration from the prior quarter, and bodes well for Mastercard MA because they are the main issuer of Citi's cards. That's why we issued a MA trade Alert earlier this morning here.

Meanwhile, Retail Services revenue grew 1% to $1.6 billion, driven by loan growth that was partially offset by higher contractual partner payments. Retail Services Average Loans and Purchase Sales increased YoY by 5% and 4%, respectively. Overall, solid loan growth numbers here.

Outside the U.S, Latin America GCB revenue was $1.9 billion, a solid increase of 3% on a reported basis and 3% in constant currency, excluding a gain from a building sale. In Asia, sales were $1.9 billion for a 3% YoY increase on a reported basis and 5% in constant dollars. This result was driven by continued growth in deposits. In total, retail banking average deposits increased 5% YoY, and Retail Banking Average Loans grew 2% YoY.

Within ICG, Total Banking revenue of $5.1 billion fell 3% YoY including gain/loss on loan hedges. Treasury and Trade Solutions (TTS) revenue came in at $2.4 billion, an increase of 4% YoY on a reported basis and 7% in constant dollars, reflecting continued strong client engagement, with growth in deposits, transaction volumes and trade spreads. Investment Banking revenue fell 10% YoY to $1.3 billion off a strong M&A comp, however, management said it outperformed the market and saw continued strength in debt underwriting. In Private Bank, revenues of $866 million were up 2% YoY driven by both new and existing clients. Lastly, Corporate Lending revenues were $538 million, down 9% YoY on lower spreads and higher hedging costs.

Markets and Securities Services revenue increased 4% YoY to $4.668 billion. Breaking this down further, Fixed Income Markets revenue fell 4% YoY excluding the Tradeweb gain as the trading environment continues to be challenging for banks, while Equity Markets fell 9% YoY reflecting lower client activity in cash equities and prime brokerage, partially offset by strong corporate client activity in derivatives. Securities Services revenues increased 3% YoY to $682 million and was driven by higher rates and increased client activity.

Looking ahead to the third quarter, management expects YoY growth in its accrual business within ICG, while markets and investment banking revenue will reflect the overall market environment. On the consumer side, management expects solid revenue growth in North America driven by U.S. Branded Cards. In Asia, management continues to expect YoY revenue growth, while Mexico underlying revenue growth will "remain somewhat muted" but with strong growth in pretax earnings. Management continues to expect net interest revenue growth of roughly $2 billion in the year, and said on the conference call that this figure includes one rate cute to occur toward the back half of the year.

Bottom Line

The results here are solid with good growth in loan, deposits, and international GCB revenue despite the concerns of a deteriorating financial condition. What also stood out to us is the continued improvement with the efficiency ratio, which continues to work its way down toward management's goal of low 50s.

The one thing going against Citi and the rest of the financial stocks Monday was how much of an outperformer it has been since the bank's capital return announcements that came in conjunction with the 2019 CCAR results, which you can read about here. But we hedged ourselves against a muted reaction to the print through our trim last week in our Alert here when the stock traded at about $71.

Lastly, we reiterate our Two rating and would look to upgrade back to a One if the stock price fell to a price closer to the $67.64 TBVPS level where the bank exited the quarter.