Citigroup Inc. (C) | Lower Ests. Due to Capital Mkts

While Citi is poised to benefit from higher non-US rates, we expect more pressure on fees (capital mkts) and US-driven NII (deposit mix) and back-ended transformation expense benefits resulting in lower ests. We also lower our price target to $60.

Like other capital markets players, Citi guided for a challenging capital markets qtr w/ trading down 20% YoY and investment banking down 25% (about double our ests. at the start of the quarter). Partly owing to higher net head count and transformation costs, Citi guided for expenses up $300-400MM (double our est). Full-year guidance for revenue was unchanged ($78-79B); however, we now est. at the low end (vs. high end previously). FY23 expenses are still expected to be around $54B.

We lower 2Q23E EPS to $1.40 (from $1.71), reflecting lower-than-expected capital markets revenue without much offset in expenses in the near term. We lower full-year 2023E to $5.85 (from $6.45), largely reflecting lower 2Q23 and slightly higher reserve builds in 2H23. We also lower FY 2024E and 2025E to $6.30 (from $6.85) and $8.00 (from $8.55). Our lower price target of $60 (from $65) reflects our lower ests and implies about 9.4x our lower '24E est.

In our recent mgmt meetings and in conference presentations, Citi has consistently said it can meet its full-year 2023 and mid-term targets, aided by revenue (Citi benefits from higher non-US rates), expenses (investments are seasoning), and credit (79% of US cards are prime; office is minor).

We remain surprised by the extent of the CEO's confidence in "bending the cost curve." First, the investments are starting to pay off, meaning that Citi is transitioning from consultants/3rd parties to more automation. Second, this leads to reductions in head count (5000 in 2Q23). Third, country exits have a multiplier effect on expense savings regionally and globally.

Citi's excess capital. The CFO recently reminded that Citi has met its targets for the past 15 months, incl. capital aided by RWA reductions of 11% since 3Q21. One question is new capital rules, which can cause a credit crunch for the industry or push more business to shadow banks. Nonetheless, Citi's buyback of $1B in 2Q23 is a touch more than previously expected.