With over $6.3 billion in buybacks and dividends in the third-quarter, return of capital remained the key focus for the bank.
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reported $1.42 in diluted earnings per share in the third quarter, as the company’s capital-return efforts reduced the share count by 7% over the past 12 months. The bank’s common equity Tier 1 ratio actually declined slightly during the quarter to 13%, and management expects this figure to eventually fall to 11.5%--well below the levels that it has maintained over the past two years. We believe the substantial capital-return program--the company wrote checks to shareholders totaling $6.355 billion for repurchases and dividends in the third quarter alone--validates our long-held Citigroup thesis.
Jim Sinegal is a senior equity analyst for Morningstar.
At the same time, the company’s trading revenue was stronger than widely expected, with principal transactions revenue declining by only 3% from the previous year. The company’s investment bank continues to surprise in an underappreciated aspect of the Citigroup story. Although fixed-income markets negatively affected results, essentially all other lines of revenue within the Institutional Clients Group actually increased from the previous year.
Furthermore, management continues to keep expenses under control, with operating costs falling 2% over the past 12 months. Efficiency improvements seem to be offsetting rising costs tied to revenue, which is another encouraging sign.
Overall, we believe Citigroup has improved its performance as we expected, and the company’s stock price has followed suit. However, with return on average equity reaching only 7.3% during the quarter, we don’t plan any major changes to our $74 fair value estimate, which represents a slight premium to the company’s $68.55 tangible book value--notably, the company’s self-reported adjusted return on tangible common equity totaled 9.8% through the first nine months of the year, just under our assigned cost of equity.
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