Last year, during the pandemic, banks would have had to set aside billions of dollars to avoid potential loan losses. If it were not for the intervention of the US government and the Federal Reserve System, the situation would have been more complicated than it actually turned out.
Among the lucky ones who survived 2020 was Citigroup, which managed to partially regain the trust of its investors by working on mistakes and shaking up its management team, which allowed the bank to adjust its course.
The largest international corporation Citigroup Inc. was founded on April 7, 1998 as a result of the merger of Travelers Group and Citicorp. The banking group manages assets with a total value of more than $1.9 trillion. The number of employees worldwide is 350 thousand. It is a leading distributor of US Treasury bonds.
Citigroup Inc. leads in two segments:
- In the Global Consumer Banking segment, the company is represented by the Citi brand and provides services in the financial and credit sector, such as investments, card servicing, etc.
- In the segment "Group of institutional clients"," wholesale trade " of services is carried out, such as servicing operations with securities, currency, banking consultations, brokerage services, etc.
Citigroup's business activities cover 160 countries and jurisdictions. To do this, the bank had to comply with the rules of different countries and the Central Bank, as well as face various geopolitical risks. Therefore, the bank strives to simplify operations and correct deficiencies in the data control and risk management system.
Now the bank wants to stop all operations in 13 countries where its divisions show weak results. In addition, according to the management of Citigroup, these markets lack long-term potential. The operations that were supposed to be sold or liquidated were able to pay off in 2020, but the indicators were still much lower than those of the rest of Citigroup's divisions serving clients in Asia, Latin and North America, which brought at least some profit.
According to CFO Mark Mason, in 2020, loans in these 13 markets almost doubled in price. They also had to allocate significant capital. Thus, the bank allocates $7 billion to maintain total assets of $82 billion.
Golden Mistakes
Citigroup has a huge operating volume. Private clients are served through the consumer banking segment, and institutional clients are served through the investment banking segment. The latter's revenue indicator in total revenue is 63%. In this segment, the bank is engaged in treasury and trading solutions, services for private banking and the financial market.
At the end of 2020, the regulatory authorities fined the bank $400 million for risk management practices and non-compliance with regulatory requirements. The reason for the imposition of the fine was "long-standing shortcomings", including the attitude to customers on insurance and foreclosure issues.
During the same period, several smaller fines were imposed on Citi. The company received one of them due to violations in the financial markets.
In addition to the fines, the bank was the victim of a major error in the amount of $893 million, which consisted in an erroneous transfer of funds to several creditors, as a result of which one of them refused to return the amount received. Citi was a loan specialist of the cosmetics company Revlon and had to pay a paltry amount of interest in the amount of $7.8 million on behalf of the cosmetics giant. Now Citi cannot pay about $504 million, which the judge declared hopeless.
But a more serious problem, quite possibly, was the lag in the share price, which kept the company's shares below the book value level throughout 2020. At the same time, the shares of competitors rose from even higher levels of the basic valuation. Investor confidence has been undermined by constant regulatory shocks.
Amid all these problems, the then CEO Michael Corbat announced his retirement and the replacement of the leader with the highly professional Jane Fraser.
What can save the bank
Emerging from lagging markets that are draining its finances, Citigroup will be able to refocus its presence in the consumer banking segment in Asia, Europe, the Middle East and Africa, focusing on four centers of financial abundance — Singapore, Hong Kong, the United Arab Emirates and London. The new structure of the bank will include two main branches: in the USA and Mexico, as well as four hubs (about them above), which will serve 100 million customers.
These important centers will allow the bank to grow significantly and provide attractive returns from its proposed asset management business, Fraser said.
As head of Citigroup, Fraser saw the growth potential of the asset management business, especially in the Asian market. Some time ago, the company announced its intention to turn client capital management and private banking into a single unit for institutional clients, which will simplify the analysis for investors. Most likely, the business with wealth brings Citigroup more than consumer privileges in the 13 markets from which the bank is seeking to leave.
In 2020, Citigroup's asset management business turned out to be quite successful, allowing an increase in assets under management by 26% by the end of the first quarter of 2021 compared to the same period last year. This figure amounted to $222 billion.
This operating volume is less than that of competitors, for example, Bank of America manages assets worth $1.5 trillion. Another competitor, JPMorgan Chase, manages $2.8 trillion in assets. But Citigroup is confident that we can expect significant progress with the support of Asia and other international markets.
In the next quarter, Citigroup will focus not on dividends, but on share repurchases, which, according to Jane Fraser, look especially attractive now that the shares are below their fair book value. This makes sense, given Citigroup's low rating. Fraser also noted that the quarterly dividend will be higher than $0.51 per share (this is the current level).
At the same time, Citigroup's quarterly dividend yield is not bad – 2.9%. The annual payout per share is $2.04 with a low payout ratio of 32%.
Although Citigroup is lagging behind its competitors this year, the figures for the first quarter look good. Thus, net profit increased to $7.9 billion, a year earlier this figure was $2.5 billion, and in the 4th quarter – $4.3 billion. Corporate lending services, trading solutions, investment programs and the treasury brought the greatest profit. The growth of stocks since the beginning of the year was about 15%.
Now we can talk about a transition period for Citigroup. Having taken over the company in March, Fraser began to transform several areas at once. We are talking about improving internal control and exiting emerging markets. His focus was on major international wealth centers, as well as on the money management business. The results of the transformation will be visible in a few quarters. But it seems that the bank is on the right track, and given the economic recovery, the next two years will be profitable for Citigroup.
In our opinion, now there is a good opportunity to buy this stock, the adjustment of which was completed just a couple of days ago. Sellers lowered the asset to $65.80, where the initiative passed to the bulls. In just two days, they raised the market to $68.45 and are unlikely to stop there.
We recommend buying these shares for a long time, as they will grow for more than a year. The nearest targets for purchases are $72, $80 and $90.
After yesterday's report on consumer inflation in the United States, which showed an increase from 7.9% to 8.5% over the month, the probability of a Fed rate hike in May by 50 basis points in the futures market increased to 90%, and analysts assume that there will be 3 such aggressive increases in 2022.Nevertheless, despite the record rate of inflation, many experts believe that it has begun to slow down, as the monthly growth rate was 0.3% with a forecast of 0.5%. Maybe the Fed will soon have to abandon aggressive tightening of monetary policy.Inflation in the G7 countriesLael Brainard has already announced the first signs of a slowdown in consumer price dynamics, noting that the Federal Reserve will continue raising rates in any case, but it may start reducing the balance sheet not in May, but in June. Her words became a lifeline for the EUR/USD bulls. Assumptions about the later start of the balance sheet reduction reduced the yield of treasuries and supported euro buyers.It is possible that Christine Lagarde's team will also support the euro. There are more and more hawkish voices in the ECB Council calling for a tightening of monetary policy. The heads of the Central Banks of Slovenia, Austria and Belgium believe that two increases in the deposit rate should take place in 2022. This attitude will help EUR/USD to find the bottom and return above 1.09. Nevertheless, trading from forex levels shows that when the day closes below 1.083, the downtrend continues.Indeed, the European currency has a lot of problems, and even a slight decrease in interest in the dollar does not indicate a change in the direction of movement of EUR/USD. 
Data from the Comex exchange indicate a decrease in the cost of copper. By 5 a.m.GMT, the price of a pound of metal dropped to $4,7105, or 0.75% compared to its value at the close of trading the day before. Yesterday, trading on the London Stock Exchange ended with a rise in the price of industrial metals. The cost of copper rose to $10,367.50 cents, or 0.5%. Aluminum rose to $3,551, or 3.4%. The price of zinc rose to $4,149, or 3%. One of the factors that has a significant impact on the markets is the US currency exchange rate. Its growth makes it unprofitable to purchase raw materials for investors with other currencies, including metals. Today, the dollar index is showing growth. It has already risen by 0.13% to 97.91 points. Statistics from China also contribute to the fall in the price of copper. Economic activity in this country is declining due to the deterioration of the epidemiological situation. In this regard, a reduction in demand for copper is expected. 
In order to limit the supply of Russian gas, the European Commission intends to gradually increase the volume of liquefied natural gas purchased in the United States. According to the plans discussed in 2021 on the import of American LNG, it was assumed that this year its volumes would be at the level of 22 billion cubic meters. Now the EU has agreed with the United States to increase this figure by 15 billion cubic meters. In total, the gas purchased in the United States in 2022 will replace 10% of Russian annual gas supplies. Thus, the abandonment of Russian gas will be carried out gradually. The European Commission plans that in 2023 additional gas supplies will grow to 35 billion cubic meters, which will be possible thanks to the diversification of gas supplies, which are currently being negotiated with international partners. The EU's efforts to enhance energy efficiency and develop renewable energy sources will also contribute to reducing dependence on supplies from the Russian Federation. 
Cryptocurrency Forecast for today. Consolidation and uncertainty of trading in the range of 48051 – 46810 dollars are visible. It is possible that market participants are waiting for US labor market data.The capitalization of the cryptocurrency market by the end of Wednesday amounted to 2.15 trillion US dollars against 1.90 on Tuesday. A negative news background can increase short positions on digital assets.The Norwegian company Opera has added support for Bitcoin, Solana, Polygon and other cryptocurrencies to the browser.Integration of multiple blockchains and second-level development solutions was called a key strategy and part of Opera's mission, which is to introduce millions of users to Web 3.0.Solana and Bitcoin are currently available only in Opera for Android. Their support in the "Crypto Browser Project" will appear in the coming months.The dollar and the cryptocurrency market will be sensitive to the release of the number of initial applications for unemployment benefits, the price index of personal consumption expenditures. The focus will also be on the business activity index (PMI) in Chicago, the unemployment rate and the index of business activity in the manufacturing sector (PMI) from ISM. 
Gold exchange rate forecast for today. The banking metal is still very sensitive to the dollar. The next signal for the market is the US unemployment rate for March. If the current value comes out better than the forecast, then there will be an additional reason for the Fed to reduce the purchase of securities.The US stock market ended Wednesday trading lower on the back of negative dynamics from the consumer services, technology and finance sectors. At the close on the New York Stock Exchange, the Dow Jones fell by 0.19%, the S&P 500 index fell by 0.63%.At the same time, there is an increase in inflation. Consumer prices in Germany, harmonized with EU standards, increased by 7.6% in annual terms in March, according to preliminary data from the country's Federal Statistical Office (Destatis).Analysts surveyed by Bloomberg, on average, predicted a rise of 6.8%. Trading Economics experts expected growth of 6.7%. In February, inflation in the country was 5.5%.As for Japan, retail sales in February decreased by 0.8% compared to the same month last year, according to data from the country's Ministry of Economy, Trade and Industry. The drop was recorded for the first time since September last year. Analysts on average expected a decline of only 0.3%. 
Forex. Pound/Dollar (GBP/USD) forecast for today. The pair gained a foothold in the area above the European support of 1.3127. At the moment, there is a strong resistance at the level of 1.3202.The yield of 10-year UK bonds is near the March maximum values at 1.668%.This time, the US dollar was under pressure against other world currencies. The US economy in the fourth quarter of 2021 increased by 6.9% in terms of annual rates, according to the final data of the US Department of Commerce. Earlier, a 7% rise was announced.Experts on average expected an upward revision of the indicator to 7.1%, according to Trading Economics.According to the revised data of the Ministry of Trade, consumer spending, which accounts for two-thirds of US GDP, increased by 2.5% in the fourth quarter, not 3.1%, as previously reported.Exports soared by 22.4%, imports increased by 17.9% - instead of the previously announced 17.6%.On Tuesday, market participants are likely to wait for the reaction of the pound after the publication of UK GDP, housing price index, business investments, investments of commercial enterprises. The US labor market data will also affect the course of trading. 
Forex. Euro/Dollar (EUR/USD) forecast for today. Positive trading dynamics was observed throughout the trading environment.The yield on 10-year US bonds has declined from the March highs and is now at 2.351%.The bidding process is still influenced by the hope that the war in Europe will end soon. The recent negotiations between the Ukrainian and Russian sides have created optimism in the financial markets.Meanwhile, the composite index of business and consumer confidence in the eurozone in March fell to 108.5 points against 113.9 points a month earlier, according to data from the European Commission. The indicator value turned out to be the lowest since March last year.Experts on average predicted a more moderate decline, up to 109 points, according to Trading Economics.The decline in the composite index is mainly caused by a decline in European consumer confidence due to rising inflation and events in Ukraine. The indicator of consumer confidence in the eurozone in March collapsed to minus 18.7 points against minus 8.8 points last month, coinciding with the consensus forecast.Today, the focus will be on the data of the Eurozone and the US labor market — the change in the number of unemployed in Germany, the unemployment rate of the Eurozone and the number of initial applications for unemployment benefits in the US. 
Cryptocurrency Forecast for today. Now the digital asset is trading in the range of 48051 – 46820 dollars. After sharp movements in the market, market participants adhere to a wait–and-see position - soon US GDP and labor market data. Financial markets, including digital assets, can react strongly to these events.The capitalization of the cryptocurrency market by the end of Tuesday amounted to 2.11 trillion US dollars against 2.13 on Monday.According to media reports, MacroStrategy, a subsidiary of MicroStrategy, took out a loan for $205 million secured in bitcoins. The loan was issued by Silvergate Bank. According to the terms of the agreement, the loan funds will be used to purchase cryptocurrencies.At the same time, the US Treasury Department proposed to extend to cryptocurrencies the requirements for informing the IRS Tax Service about foreign accounts of citizens with assets over $50 thousand. The relevant document is published on the official website of the department. If adopted, the new requirements will come into force in 2023.Representatives of the Hong Kong Stock Exchange announced the launch of a platform for trading tokenized assets called Diamond. The trading service will use smart contracts, blockchain and cloud computing technologies, thanks to which it will be able to work around the clock.