Why Citi remains cautious on key profitability metric

• Key insight: Citi slightly revised its expectations for its 2026 return on tangible common equity, saying Tuesday that it now projects the metric will be "above 11%."
  
• What's at stake: The metric has been closely watched as a sign of whether CEO Jane Fraser's multiyear overhaul is working.
  
• Supporting data: Citi's return on tangible common equity was 11.5% for the third quarter, down from 13.1% in the first quarter and 13% in the second quarter.

Citi continued its streak Tuesday of better-than-expected quarterly results, reporting its highest third-quarter revenue in a decade and exceeding bank analysts' earnings-per-share forecasts.

Processing Content

It also slightly lifted a closely watched profitability target. But some observers wondered why executives weren't more aggressive, considering Citi's strong year-to-date performance, and voiced concern that the guidance could imply some unfavorable fourth-quarter results.

Citi now expects its return on tangible common equity to be "above 11%" for full-year 2026, it said Friday. It had been projecting 10% to 11%, then revised its estimate nominally last month to be "a bit above" 11%. The metric, which offers insight into a bank's financial performance, has been one of the ways in which investors have been measuring the success of Citi's multiyear turnaround.

For the third quarter, Citi's return on tangible common equity was 11.5%. It was 13.1% for the first quarter and 13% for the second, coming in at a combined 12.6% for all three quarters.

Chief Financial Officer Gonzalo Luchetti was quick to offer an explanation for management's decision to be conservative, warning on the bank's earnings call Tuesday that "natural seasonality" in the markets business could result in reduced fourth-quarter revenues. He also reminded analysts that Citi's stated No. 1 priority is "driving sustainable return improvement."

In response to an analyst's viewpoint that the return for the fourth quarter "looks really lousy," Luchetti said: "We could do better, but it's hard to predict early in the quarter, especially how some of the activity will play out in the market mostly. And so it's really anchored on that."

At least one analyst appeared satisfied with the answers. In a research note following Tuesday's call, John McDonald, an analyst at Truist Securities, wrote that though "the guidance implies a deceleration" in the fourth quarter, the outlook assumes a sequential decline of 20% in the markets business. Broadly, Citi's full-year return on tangible common equity assumptions "reflect an abundance of caution rather than a view of slowing core business momentum."

Citi's business-model overhaul — and the proof points that it's working — continue to be one of the most-watched transformations in the industry. Led by CEO Jane Fraser, American Banker's Most Powerful Woman in Banking for six consecutive years, the $2.9 trillion-asset global bank has exited 12 of 14 consumer franchises in overseas markets, restructured its operating model around five core businesses and shrunk management layers from 13 to eight.

The bank has also undergone a costly, multiyear compliance and risk-management revamp to address repeated risk and internal controls failures. It also continues to operate under a pair of consent orders tied to risk-management blunders, though the remediation work is getting closer to being finalized, thus reducing some of the costs related to the project, executives have said.

At an investor day in May, Citi established new targets for return on tangible common equity, which executives reiterated Tuesday. The bank expects to deliver a return on tangible common equity of 11% to 13% in 2027 and 2028, followed by 14% to 15% between 2029 and 2031.

"We remain confident in the strategy we laid out at Investor Day and in our ability to deliver on all of our commitments," Luchetti said on Tuesday's call.

Citi reported strong results for the third quarter. Net income totaled $5.2 billion, an increase of 40% year over year. Excluding a special goodwill-impairment charge recorded in the third quarter of last year, related to Citi's Banamex franchise in Mexico, net income was up 17% year over year.

Earnings per share for the quarter totaled $2.85, beating the estimated $2.65 per share that analysts polled by S&P Capital IQ had predicted. Revenues of $23.8 billion rose 8% year over year, marking the bank's highest third-quarter revenues in a decade, executives said.

During the quarter, Citi returned $4.1 billion to shareholders in the form of dividends and share repurchases. Year to date, the bank returned $16.5 billion, including $13.3 billion in buybacks.

Citi made an upward revision to its full-year outlook for net interest income, excluding markets, saying it now expects year-over-year growth to land in the mid-to-high 6% range. Previously, it had predicted growth of 5%-6% for that category. It also made a positive revision to its efficiency-ratio guidance, which went from roughly 60% to below 60%.

The bank tweaked its expectations for net credit losses in its U.S. credit card business. It now expects net credit losses of 4%, at the low end of the 4%-4.5% range previously expected.

Read more:

• As fintechs nab bank charters, what's happening to BaaS?
• A capital-rich Michigan bank announces its first deal since 2021
• Chris Britt still says banking is broken, but Chime can fix it
• Credit unions bulk up a business that banks long dominated

During the third quarter, four of Citi's five core businesses recorded upticks in revenue compared with the year-ago quarter.

The outlier was U.S. credit cards, where revenues were flat year over year. While the segment's net interest income was up 6% year over year, its fee income was down 62%, due to higher accrual for partner payments and reward costs, partially offset by higher interchange and annual fees, the bank said.