As its new CEO, Jane Fraser, tries to turn the bank around, Citigroup (NYSE: C) is trading at a very cheap valuation relative to its peers and the industry as a whole. Not only does Citigroup need to tackle regulatory issues, Fraser is also looking to refresh the bank’s strategy, which has kept it behind other major U.S. banks for years.
A key part of this refresh will likely involve a stronger focus on Citigroup’s Treasury and Business Solutions (TTS) division, which Fraser recently called the bank’s “crown jewel” and a great driving force behind the bank. evaluation in the future. Let’s see how this division fits into the whole bank right now and if it can help Citigroup deliver shareholder services.
What is the TTS division?
Of the four largest US banks in terms of assets, Citigroup is, in my opinion, the most difficult to understand and analyze. Its economic model is more global than those of JPMorgan Chase, Bank of America, or Wells fargo, and she has the smallest loan transaction of the four. But these two factors probably explain why Citigroup has developed a world-class treasury and commerce division.
The TTS division is part of Citigroup’s largest institutional client group, but it primarily helps companies around the world manage their operations. TTS solutions help customers perform import and export transactions, manage liquidity and process payments, using analytics to help them operate more efficiently. The TTS Group operates in 160 countries and 140 currencies, and processes approximately $ 3 trillion in daily transactions.
At a recent conference, Fraser said:
After leading Latin America, I saw that businesses cannot function without us, the multinationals on the ground. So it really becomes this network that we have in cash management in forex, trading and lending. â¦ Considering the dynamics in the world and, you know, the competitive position of the business, it’s very hard to turn that around.
In 2020, TTS generated over $ 9.5 billion in revenue for Citigroup. At the end of the first quarter of 2021, TTS Group’s outstanding loans reached nearly $ 71 billion, while the division’s deposits stood at $ 649 billion.
Does TTS stimulate valuation?
To some extent, TTS has been a driver of valuation as it is a part of banking that investors and analysts cite as a huge advantage at Citigroup, as well as investment banking and card operations. bank credit. But the $ 9.5 billion in revenue Citigroup generated from TTS was only about 13% of total revenue in 2020, and that hasn’t been enough in recent years to overcome issues with others. parts of Citigroup’s operations, such as parts of its Global Consumer Bank. .
Citigroup just quit its consumer banking operations in 13 global markets that were inefficient, used too much capital, and faced credit quality issues during the pandemic. Investors generally seemed happy with the move, but there is still work to be done at Citigroup’s US retail bank, which typically doesn’t have roughly the same stature as other big US banks like JPMorgan.
At the same conference Fraser spoke to, Autonomous Research analyst John McDonald noted that investors told him it would be great to see TTS become a bigger part of Citigroup’s business. Unfortunately, given that it only accounts for a small portion of total revenue, TTS has struggled to overcome some of the World Bank’s consumer pitfalls. Additionally, Citigroup’s profits from its credit card and other investment banking capabilities are still a bigger piece of the pie, so TTS isn’t really determining the bank’s valuation at this time. although he contributes to it.
The good news is that Fraser seems to indicate that the bank recognizes this and will invest more and put more effort into creating unmatched TTS platforms and capabilities in the future.
Can he conduct the assessment?
While TTS is clearly Citigroup’s “crown jewel”, it still needs to evolve further if it is to truly drive the bank’s valuation. If Citigroup invests more in the unit and makes it a bigger share of total revenue, I’m sure investors will reward Citigroup with a much more attractive valuation and share price than it has. currently. And with Citigroup refreshing its strategy and starting to pull out of businesses and geographies where it has failed or lacks the scale to compete, it should be able to focus more on areas such as TTS in the past. ‘to come up.
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