Citigroup Inc (NYSE:C), like many others in the banking sector, has been severely affected by the low-interest rate environment. However, the company managed to improve its credit quality, during the 3Q2015. This coupled with a stronger capital position and lowered expenses helped Citigroup beat analyst estimates for 3Q2015. Unfortunately, the Citigroup still suffers from reduced revenues and the potential of litigation risks and regulatory issues. However, the investors would have a lot to look forward to in the coming year.
Investor Takeaway
Recently, the Federal Reserve approved Citigroup’s capital plan. As per the new plan, the company has increased its dividend payout by 400%. Citigroup’s last dividend payout was $0.05, paid on November 25. Added to this, the company has been permitted to repurchase $7.8 billion worth of common stock. The approval from the Federal Reserve was a great accomplishment on part of the Citigroup. This is because the company’s capital program was rejected by the Reserve for qualitative reasons, last year. Therefore this victory has highlighted improvements in the company’s capital planning process.
Business Improvements
Apart from the improving capital, Citigroup has been trying to produce growth in its core business. This is being done through progress in international operations. Additionally, the company is also focusing in optimizing branch network, so as to focus more on urban markets. Furthermore, this strategy also includes reduction of head-count per branch and removing branches with low margins. In 2014, Citigroup closed around 200 branches and plans to close 50 more by the end of 2016. This move is expected to save $3.4 billion annually.
Due to the low-interest rate environment that has been persisting in the industry, the company has shifted its focus on its fee based business. Added to this, the shrinking of non-core assets should help the company improve its margins and generate more revenues in the long-term, despite the market conditions. Furthermore, this should reduce the company’s risk profile and free up capital for future investments, once the environment changes.
Recently, on the sale of its subsidiary, One Main Financial, the CEO of Citigroup Inc (NYSE:C), Michael Corbat, revealed that the company is exercising a strategy of simplifying and shrinking its business, while shifting focus towards Institutional and Consumer Banking. Additionally, the company has also decided to reduce financing to coal companies. This step should help the company further improve its credit facility, since the market for fossil fuels has been facing headwinds as well. Furthermore, this is also in line with Citigroup’s Environment and Social Policy framework.
Potential Risks
Even though Citigroup seems to be on the path to long-term growth, the company faces a huge risk from pending lawsuits. These have been filed by regulators and investors. Although a number of these cases have been resolved by the company, relating to risky mortgage securities, Citigroup still has several cases that are still pending. Until these lawsuits are resolved, the company would continue to face huge losses in litigation fees.
However, one of the biggest problems that Citigroup has to face is the uncertainty of its business model. The company is subject to a number of regulatory changes and uncertainties in the banking sector. This tends to make it very difficult for the management to implement any long-term plans. Additionally, this also creates higher regulatory compliance risks and costs.
Conclusion
Citigroup Inc (NYSE:C) is currently on a path to long-term growth, provided that it does not face any problems from the regulatory bodies. Furthermore, it is necessary that the management sticks to its current business model, in order to improve its share value. Currently, the investors would be pleased with the stock, given the increase in dividend. However, pending legal issues is something that needs immediate attention of the management and should be sorted out swiftly.
