Citigroup

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

Citigroup Inc. is a multinational financial services company offering a wide array of banking and financial products to consumers, corporations, governments, and institutions worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Citigroup operates across diverse segments including Global Consumer Banking (GCB), Institutional Clients Group (ICG), and Legacy Franchises. The company has been undergoing a strategic transformation to simplify its business and improve profitability.

Business Overview

Citigroup’s revenue is broadly distributed across its different segments. The company has made significant divestitures of its international retail operations to focus on the segments with higher returns.

  • Global Consumer Banking (GCB): Includes retail banking and wealth management, generating revenue from consumer banking fees, deposits, and wealth management services.
  • Institutional Clients Group (ICG): Provides services to large corporations and institutional clients. The main sources of revenue are: Global Markets, Investment Banking, Corporate Lending, and Transaction Services.
  • Legacy Franchises: Consists of businesses that Citi has divested or will divest from including the Retail banking and consumer finance businesses in Latin America and Asia.

The banking industry is undergoing a period of rapid change due to technological innovation, regulatory changes, and shifting customer preferences. While large banks like Citigroup benefit from scale and diversified revenue streams, they are also challenged by fintech companies which may offer innovative and digital solutions. Increased interest rates have led to increased net interest income in banking as well, which may be a driver of future profitability.

Citigroup faces intense competition from other global banks such as JPMorgan Chase, Goldman Sachs, and Bank of America. Each segment of Citi competes against both specialized competitors (like pure-play investment banks) and other large diversified firms. It’s a commoditized market.

Moat Analysis

The nature of the banking industry makes it inherently difficult to build a strong and sustainable economic moat. While some financial institutions may have brand recognition and a scale advantage, regulatory and financial risks make them easily interchangeable and prone to disruption. The financial structure of banks is different from the standard enterprise as they operate under different capital and leverage rules making standard analysis of moats difficult.

  • Brand: Citigroup has a well-known brand name, but it doesn’t provide much pricing power because of low customer switching costs. Customers are often sensitive to price and prefer cheaper products instead of well-known brands.
  • Scale: While Citigroup has a large global reach, this benefit is quickly offset by the scale of competitors, given they have similar operating models.
  • Switching Costs: Switching costs are relatively low, making it very easy for customers to move their banking relationships to another bank for a few dollars better return.
  • Network Effect: There is a small network effect of banks, they provide payments systems that are more valuable as other people bank with them (and vice-versa) but that is not defensible to disruption.
  • Regulatory Licenses: Banks are obviously regulated and require regulatory approvals, but that is also an additional cost burden that doesn’t provide a moat to incumbent players (as a new bank will follow all the same regulations)

In conclusion, Citigroup has only a minimal moat stemming from brand recognition, and maybe a minor degree of scale, and thus its moat is rated at 1.5/5.

Balance Sheet Health

The balance sheet of Citigroup is complicated due to the numerous financial instruments, derivatives and securitizations it uses. It is also undergoing a period of transition and restructuring after having sold many parts of its retail banking operations.

  • Leverage: The company has a lot of debt ($2.5 Trillion), and a high leverage with total debt as compared to market capitalization. However, this leverage is normal for the banking industry.
  • Liquidity: The company has a sufficient amount of high-quality liquid assets. These liquid assets are usually used to fund the daily operations.
  • Reserves: Loan reserves are relatively high. A good thing for safety, but may also mean lower profitability.

Considering these points, the balance sheet has some signs of concern but is within the normal range for a large multinational bank, which is why the balance sheet health rating is only at 3 / 5.

Understandability Rating

Understanding a bank’s financials and complex instruments is notoriously difficult, making it hard for an average person to fully understand the nuances of Citigroup’s business. Moreover, Citigroup is making so many changes to its business model and reporting process, further complicating matters. For these reasons, an understandability score of 3 / 5 is appropriate for Citigroup.

Key Recent Concerns and Management’s Response

  • Loan Defaults: There are concerns about increased credit defaults by the bank’s clients as the economy cools down. While Citigroup is aware of this and making appropriate credit provisions, it is still a relevant concern for the future that should be monitored.
  • Russian Exposure: A very specific, but relevant recent controversy is Citigroup’s exposure to Russia’s economy. This is a low-probability but very high risk tail-event. Citigroup has disclosed its financial exposure to Russia, and has been trying to reduce its liabilities to that country. This is a concern that should be monitored closely.
  • Strategic Transformation: The company is in the middle of a complex and large restructuring process. This introduces some uncertainties as to the profitability and growth direction of the company. Management has stated to be fully committed to its restructuring, with a focus on efficiency and returns.