Citi's Path to $100 a Share Won't Be Easy
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.)
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.
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. 1
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.
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.
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.
As an aside, it's still aiming to reach 10 percent by 2019. 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.
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