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The Ratings Game: Analyst eyes better-than-expected ROTCE target for Citi but uncertainty remains

Citigroup’s expected guidance on its return on average tangible common equity (ROTCE) may exceed Wall Street’s expectations when it provides an update next week at its investor day, an analyst said on Thursday.

But Citigroup
C,
-6.63%

also faces uncertainties around the exit of its overseas businesses, as well as cost growth, higher loss provisions and tough comparisons in investment banking and trading, said Jefferies banking analyst Ken Usdin.

Usdin reiterated his buy rating on Citigroup, with a price target of $79 a share. Shares of Citigroup have dropped about 0.5% so far in 2022, including a dip of 5% on Thursday to $60.06 amid a broad market selloff. Still, Citi is outperforming the SPDR S&P Bank ETF
KBE,
-4.75%
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which is down by 2.6% this year, including a 3.7% drop on Thursday.

At its upcoming investor day on Wednesday, March 2, Usdin said he expects Citigroup to issue long-term ROTCE targets of 10% to 12%. This is below the bank’s 14% ROTCE target it issued at its investor day in 2017, but above Wall Street’s latest expectations. Analysts surveyed by FactSet currently expect ROTCE of 9.2% in 2022, 9.6% in 2023 and 10% in 2024 for Citigroup.

Usdin said he anticipates a “mixed” outlook from Citi in 2022.

“Higher rates, higher revolving card balances, mix shift into higher-return businesses, and capital flexibility from business exits will help,” Usdin said. “Offsets are likely from higher provisioning, investments needed to fund strategic priorities, higher capital ratios and lower investment banking/trading revs.”

Wall Street is still awaiting an update on efforts by Citi to shed retail banking operations in Asia, Europe and Mexico, as it focuses on wealth management and other more lucrative business lines.

The investor day will also mark the first for CEO Jane Fraser, who took the job about 13 months ago as the bank’s first woman in that leading position.

“Specifics surrounding areas of investments and CEO Jane Fasier’s image for the new Citi will be important to understand the feasibility of long-term targets,” Jefferies analyst Usdin said.

The sale of Citi’s Mexican and Asia businesses could free up $12 billion of allocated tangible common equity over time, before any related gains or losses on sales or wind downs, and reduce loan-related risk-weighted assets by at least $70 billion, Usdin said.

Overall, Usdin expects Citi to reiterate themes from its fourth-quarter earnings to become a top bank for institutions with global businesses; a boosted wealth management effort and a large presence in the U.S. through its many bank branches and credit card offerings.

“Management will likely provide explicit investment spending details and show how it should translate to improved profitability,” Usdin said. “Areas of focus will be Treasury & Trade Solutions (TTS), commercial banking, and wealth mgmt., which can produce 20% plus returns. We will also be listening for updates on the U.S. retail banking/digital strategy and steps Citi can take to increase card/payments scale.”

See Also: Citigroup’s Mexico divestment takes Wall Street by surprise

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