Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Citigroup Inc. is once again ready for its close-up. 

The New York bank on Tuesday hosted its first investor day in more than nine (nine!!) years. Management stepped up to the task of convincing investors that the bank is no longer a turnaround story, pushing instead the idea that it's on a growth trajectory. A more than 3 percent pop in its stock suggests shareholders are buying into the hype that the lender has -- in CEO Michael Corbat's words -- "passed an inflection point" and can deliver on revamped targets which could propel shares as high as $100 by 2020. (The stock's at about $68 now.)

It's Been a Long Road
Citigroup's shares are close to their highest level since January 2009, thanks in part to increased belief that it can -- and will -- deliver substantial earnings growth through 2020
Source: Bloomberg

Can the bank meet its various goals? It's possible, but investors shouldn't accept that it's a given or that it will be easy. Executives reiterated that the majority of the bank's earnings growth will be "driven by things within our control," but that's not quite the case. 

Ingredients Needed
To reach $100 a share, Citigroup is assuming compounded annual growth in earnings of 15-20% through 2020. Some of these elements may be harder to guarantee than others.
Source: Citigroup presentation

Citi's path to enhanced profitability -- defined by a return on tangible common equity of 11 percent by 2020 -- assumes another two years of generous payouts in the range of $20 billion or more.

Cash Back
Citigroup is poised to boost its returns by whittling down its excess capital. It plans to hand back $60 billion (or more) to shareholders over the next three years.
Source: Company presentation

That assumption is certainly realistic, but by definition, it isn't within Citi's control: the lender has to pass future stress tests and in doing so, must gain approval from the Federal Reserve before it can keep whittling away at its levels of excess capital even if they are well above the regulatory minimum.

Buy, Hold, Sell?
Wall Street analysts are still broadly bullish on Citigroup despite the bank's more than 30 percent rally since the U.S. election in November
Source: Bloomberg

The same goes for its earnings growth. Citi can keep a tight grip on expenses and its global consumer banking arm certainly has the potential to grow, thanks to gains by its wealth-management and credit-card units in the U.S. and Mexico. But it's still somewhat reliant on future interest-rate hikes, which may result in as much as $2.1 billion in annual net interest revenue by 2020 but once again, by definition, are outside its control. 

Credit Mix
Even though it's growing its U.S. branded credit-card portfolio, Citigroup has kept a lid on risk, as measured by its clientele's credit scores. Rivals have increased their risk exposure.
Source: Citigroup presentation

Investors have been waiting since May 2008 to hear from Citi's top executives in such a forum, and now that they have, they appear receptive to the bank's efforts to rebuild credibility and its upbeat messaging. But by improving transparency and laying out its intentions, Citi is setting itself up to become an even likelier target for activists if it misses the mark when it comes to delivering on long-awaited results. Lucky then, that investors seem to have granted it a couple of years to prove its mettle. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. As an aside, it's still aiming to reach 10 percent by 2019l. That's a level it had planned on hitting by 2015 but investors have -- for now at least -- forgiven Citi for testing their patience and granted the bank some extra time.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net