Citigroup Inc. (C) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary indicates strong financial performance, AI integration, and capital returns. The Q&A section reveals positive analyst sentiment, with growth in credit card trends, cross-border transactions, and increased buyback guidance due to earnings momentum. Despite some uncertainties like regulatory impacts and transformation costs, the overall sentiment is positive, driven by strong earnings, optimistic guidance, and ongoing strategic investments.

Key Financial Performance

Net Income $4 billion, earnings per share of $1.96 with an ROTCE of 8.7%. Revenues were up 8%. The increase was driven by growth in each of the 5 businesses, partially offset by a decline in other areas.

Services Revenue Up 8%, with robust growth in both loans and deposits. Underlying fee drivers such as cross-border activity and U.S. dollar clearing grew nicely. ROTCE for the quarter was 23%.

Markets Revenue Up 16%, the best second quarter since 2020. Fixed income flows in rates and currencies were particularly strong, backed by client momentum and improved monetization. Equities had the best second quarter ever with record prime balances.

Banking Revenue Up 18%. Growth driven by significant transactions, including Boeing's $11 billion sale of Jeppesen and Nippon Steel's $15 billion acquisition of U.S. Steel. Sustained momentum in M&A and leveraged finance.

Wealth Revenue Up 20%, with noninterest revenue up 17%. Pretax margin of 29%. Growth in all lines of business, though inflows slowed due to macro uncertainty.

USPB Revenue Up 6%. Significant growth in branded cards, while retail services faced pressure from lower sales activity at partners. Retail banking benefited from improving deposit spreads.

Capital Return Over $3 billion returned to common shareholders, including $2 billion in share repurchases. Year-to-date share repurchases totaled $3.75 billion as part of a $20 billion plan.

Expenses $13.6 billion, up 2%. Driven by higher compensation and benefits, offset by lower tax and deposit insurance costs. Investments in transformation and technology contributed to the increase.

Cost of Credit $2.9 billion, primarily consisting of net credit losses in U.S. cards and a firm-wide net ACL build driven by Services, Banking, and Legacy Franchises.

Services ROTCE 23.3% in the quarter and 24.7% year-to-date. Positive operating leverage for the fourth consecutive quarter.

Markets ROTCE 13.8% in the quarter and 14% year-to-date. Positive operating leverage for the fifth consecutive quarter.

Banking ROTCE 9% in the quarter and 9.8% year-to-date. Positive operating leverage for the sixth consecutive quarter.

Wealth ROTCE 16.1% in the quarter and 12.8% year-to-date. Positive operating leverage for the fifth consecutive quarter.

USPB ROTCE 11.1% in the quarter and 12% year-to-date. Positive operating leverage for the 11th consecutive quarter.

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Operating Highlights

Citi Token Services: A leading digital asset solution now live in 4 major markets, processing billions of dollars of transactions since launch.

Citi Strata Elite: A new proprietary premium credit card to be introduced later this quarter, targeting affluent customers.

Cross-border activity and U.S. dollar clearing: Growth in these areas contributed to an 8% revenue increase in Services.

M&A and ECM: Significant growth in M&A (up 52%) and ECM (up 25%) with notable transactions like Boeing's $11 billion sale and Nippon Steel's $15 billion acquisition.

Transformation and automation: Investments in streamlining processes, platforms, and deploying AI tools to improve efficiency and reduce manual touchpoints.

Expense management: Focused on reducing stranded costs and productivity savings to self-fund investments in transformation and technology.

Divestiture of international consumer businesses: Continued progress with the sale of the Poland business expected to close next year.

Capital return to shareholders: Returned over $3 billion in capital this quarter, including $2 billion in share repurchases, and increased dividend to $0.60 per share.

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Risk or Challenges

Macroeconomic Uncertainty: Clients exhibited caution amidst macroeconomic uncertainty, leading to slowed inflows in Wealth Management. Additionally, pauses in capital expenditures and hiring among clients were observed, which could impact business growth.

Regulatory and Compliance Costs: The company continues to face high expenses related to transformation and compliance, including investments in risk and control environments. While progress is being made, these costs remain significant.

Credit Risks: The firm reported a net ACL build driven by services, banking, and legacy franchises, as well as net credit losses in U.S. cards. Corporate nonaccrual loans also increased due to idiosyncratic downgrades.

Geopolitical Risks: Transfer risk associated with client activities in Russia led to a net ACL build, highlighting exposure to geopolitical uncertainties.

Expense Management: Higher compensation and severance costs, along with investments in technology and transformation, are pressuring the expense base. While productivity and stranded cost reductions are helping, expenses remain elevated.

Legacy Franchises: Revenues from legacy franchises declined due to factors like the Mexican peso depreciation and the expiration of transition service agreements, which could continue to weigh on overall performance.

Retail Services Pressure: Retail services revenues declined due to lower sales activity at partners and higher partner payments, which could impact profitability in this segment.

Market Sensitivity: Actions to reduce asset sensitivity in a declining rate environment have led to lower revenues in Corporate/Other, indicating vulnerability to market rate changes.

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Guidance & Outlook

Revenue Expectations: Citigroup expects to be at the higher end of its full-year revenue range, around $84 billion, with net interest income (excluding markets) projected to grow closer to 4%.

Expense Projections: Expenses are expected to be around $53.4 billion for the year. However, if revenues exceed $84 billion, expenses will increase proportionally.

Credit Metrics: Net credit losses are expected to range between 3.5% to 4% for branded cards and 5.75% to 6.25% for retail services. The allowance for credit losses (ACL) will depend on macroeconomic conditions and business volumes.

Capital Return: Citigroup plans to repurchase at least $4 billion in shares in the upcoming quarter as part of its $20 billion share repurchase program. The quarterly dividend will increase to $0.60 per share starting in Q3 2025.

Transformation Expenses: Transformation expenses are expected to decrease starting next year as many programs reach their target state.

Digital Asset Strategy: Citigroup is expanding its Citi Token Services, a digital asset solution, which is now live in four major markets with plans for further expansion.

ROTCE Target: The company is targeting a return on tangible common equity (ROTCE) of 10% to 11% in 2026, with plans to exceed this level in the long term.

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Shareholder Return Plan

Dividend Increase: An increased dividend of $0.60 per share will begin in the third quarter.

Share Repurchase: During the quarter, $2 billion in share repurchases were completed. Year-to-date, $3.75 billion of shares have been repurchased as part of a $20 billion repurchase plan. The company remains committed to repurchasing shares each quarter under this program and expects to buy back at least $4 billion in the next quarter.

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Key Q&A

Q:Can you give us a sense of what you think the long-term return profile could look like roughly and what you see as the key drivers to higher returns beyond '26?

A:Jane Fraser emphasized confidence in the firm's strategy and highlighted three drivers for higher long-term returns: revenues, expenses, and capital. She detailed growth in Banking, Services, Wealth, Markets, and U.S. Personal Banking, supported by investments, new client wins, and product innovations. Mark Mason added that expense discipline, productivity improvements, and efficient capital use would also contribute to higher returns.

Q:Why is there a big step down in the second half revenue forecast despite the strong first half?

A:Mark Mason explained that the second half tends to be seasonally softer, particularly in markets. The $84 billion guidance includes this seasonality and assumes a market's second half consistent with historical trends. He also noted continued loan and deposit growth in a stable rate environment.

Q:Is 13.1% still the right level for the year-end capital target, and when might the management buffer be readdressed?

A:Mark Mason stated that the 13.1% target depends on regulatory clarity regarding SCB levels and timing. He emphasized the firm's focus on returning capital responsibly and noted that the management buffer is regularly assessed based on volatility and regulatory developments.

Q:What expenses could be freed up when the OCC consent order is lifted?

A:Mark Mason mentioned that transformation expenses, which were $3 billion last year, are expected to trend down in 2026 and beyond as programs are completed and validated. Jane Fraser added that expense reductions occur as work is completed and handed over to regulators, not necessarily when the consent order is lifted.

Q:What actions are being taken to ensure advanced capital metrics do not become a binding constraint?

A:Mark Mason explained that standardized CET1 is currently the binding constraint, but the firm is optimizing risk-weighted assets under both standardized and advanced frameworks. He noted that regulatory changes could impact the relevance of advanced metrics, and the firm is managing capital efficiently while considering these developments.

Q:How is Citi approaching stablecoins and digital assets?

A:Jane Fraser described digital assets as an evolution in payments and liquidity. Citi is developing capabilities like Citi Token Services to modernize its business, grow revenue, and acquire clients. The firm is exploring areas like reserve management, tokenized deposits, and custodial solutions, emphasizing its leadership in cross-border transactions.

Q:What were the transformation costs for the second quarter, and where are they expected to go?

A:Mark Mason did not provide a specific figure for Q2 transformation costs but reiterated that they are increasing meaningfully in 2025 and expected to trend down in 2026 and beyond.

Q:What is the status of the Banamex IPO?

A:Jane Fraser stated that preparations for the Banamex IPO are on track, with audited financial statements expected later this quarter. The goal is to be ready for an IPO by year-end, but timing depends on market conditions and regulatory approvals, which could extend into 2026.

Q:What is driving the improvement in credit card trends and second-half loss outlook?

A:Mark Mason highlighted steady delinquency and loss rates consistent with pre-COVID seasonality. He noted growth in spend among affluent customers and essentials, with confidence in the NCL guidance range.

Q:Is the sub-$52.6 billion expense target for next year still achievable?

A:Mark Mason confirmed the target and emphasized the importance of balancing expense discipline with investments to sustain revenue growth and improve returns.

Q:What progress has been made in Investment Banking and Markets, and is there room for further balance sheet commitment?

A:Jane Fraser and Mark Mason highlighted growth in areas like prime brokerage, private capital, and financing businesses. They emphasized disciplined capital allocation and opportunities for high-return investments while continuing to optimize low-return areas.

Q:What is the outlook for loan yields given excess capital and limited demand?

A:Mark Mason noted continued loan growth in areas like trade loans, cards, and private credit. He acknowledged some spread compression but emphasized good yields and the redeployment of maturing investments into higher-yielding assets.

Q:What is driving the fee trends in TTS and global activity?

A:Jane Fraser and Mark Mason highlighted strong cross-border transaction growth, new client wins, and operating deposit growth. They noted that fee revenue, including revenue sharing, was up 6%, reflecting strong client engagement and activity.

Q:What is the rationale behind the increased buyback guidance?

A:Mark Mason attributed the increased buyback guidance to strong earnings momentum and confidence in the firm's performance. He also noted the favorable regulatory tone and SCB direction, which provide flexibility for capital returns.

Q:What is the path to higher returns in U.S. Personal Banking?

A:Jane Fraser outlined a strategy focused on revenue growth, expense improvements, and capital efficiency. She highlighted investments in digital capabilities, product innovation, and AI, as well as the importance of the retail bank as a feeder for Wealth.

Q:Review of Unclear Management Responses

A:Management avoided providing specific targets for long-term returns beyond 2026, citing confidence in the firm's trajectory but refraining from detailed projections. Additionally, they did not disclose the exact transformation costs for Q2 or provide a clear timeline for lifting the OCC consent order, focusing instead on ongoing progress and sustainability.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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