How Should You Play Citigroup Stock After It Beats on Q3 Earnings?

Core Insights - Citigroup, Inc. demonstrated strong performance in Q3 2024, with earnings and revenues exceeding the Zacks Consensus Estimate, primarily driven by growth in investment banking revenues [1][2] - The company is focusing on core operations and divesting non-core units to enhance growth potential [4][14] Investment Banking Performance - Investment banking revenues increased by 39% year-over-year in the first nine months of 2024, supported by growth in debt capital markets, advisory, and equity capital markets [2] - Overall fee revenues rose by 6% during the same period, indicating strong momentum across services and banking divisions [2] Interest Income and Rate Cuts - The Federal Reserve's recent rate cuts are expected to support Citigroup's net interest income (NII) in the long term, with projections of further rate reductions in 2025 [3] - NII fell by 2% in the first nine months of 2024 due to high funding costs, while the net interest margin (NIM) declined to 2.33% in Q3 2024 [3][4] Strategic Divestitures - Citigroup is streamlining operations by exiting consumer banking businesses in various markets, including Korea and Russia, to focus on wealth management and personal banking [5] - The sale of its China-based onshore consumer wealth portfolio to HSBC China and the acquisition of Citi Trust for $80 million are part of this strategy [4] Regulatory Challenges - The company is facing increased regulatory scrutiny, including breaches of the Fed's Regulation W, which may hinder its growth plans [7][8] - U.S. Senator Elizabeth Warren has called for limitations on Citigroup's growth due to its repeated regulatory failures [8] Credit Losses - Citigroup reported a 52% increase in net credit losses in the first nine months of 2024 compared to the same period in 2023, attributed to changing consumer spending habits [9] - Management anticipates net credit losses of 3.5-4% in the branded cards business and 5.75-6.25% in retail services for 2024 [9] Stock Performance and Valuation - Year-to-date, Citigroup's stock has gained 26.3%, underperforming the industry average of 31.2% but outperforming the S&P 500's 24.2% growth [10] - The stock is currently trading at a forward P/E of 9.02X, below the industry average of 12.47X, indicating it is undervalued relative to peers [13] Future Outlook - The emphasis on core business growth and divestitures provides a solid foundation for Citigroup's future, although increased expenses and regulatory scrutiny present challenges [14] - Investors are advised to monitor the company's ability to navigate these challenges while capitalizing on emerging opportunities [14]