Where Will Citigroup Be in 3 Years?

Key Points

• Citigroup has been working on a company-wide transformation since 2021.

• Progress is being made. The bank has been divesting international consumer banking divisions and investing capital into higher-returning businesses.

• The stock recently hit highs not seen since 2008.

The large U.S. money center bank Citigroup (NYSE: C) has enjoyed quite the run. The stock is up over 75% in the last five years and now trades at over $88 per share (as of July 3), highs not seen since 2008.

Citigroup also trades at about 97% of its tangible book value (TBV), a significant discount to peers, despite having materially grown TBV per share in recent years. Investors are certainly pleased with the progress and wondering if Citigroup can keep the momentum going. Where will the bank be in three years?

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Finishing the transformation

Shareholders have been through the ringer with Citigroup. They've dealt with consent orders and lackluster returns, which has kept the stock depressed until recently.

But when current CEO Jane Fraser took over in 2021, she immediately launched a companywide transformation plan. The transformation included divesting international consumer franchises that were inefficient from a capital perspective. Citigroup also decided to divest its highly profitable international consumer banking operations at its Mexican subsidiary Banamex. The idea is to free up capital that management could use to invest in higher-returning businesses like investment banking, wealth management, and Citigroup's crown jewel, treasury and trade solutions (TTS).

Image source: Getty Images.

Freed-up capital has also been used to repurchase shares below TBV. These types of accretive buybacks increase TBV per share, which bank stocks trade relative to, so higher TBV tends to result in a higher share price over time.

Citigroup has largely completed sales or exited most of its international consumer banking operations. Banamex has taken longer than management would have liked. Selling the consumer business turned out to be difficult because the Mexican government had to approve the seller, and Citigroup ended up abandoning the process. Management then chose to split its Mexican consumer business from its institutional business and spin it off into an initial public offering. Fraser on the company's most recent earnings call said the bank would like to be in a position to take Banamex public by the end of the year.

With the transformation getting closer to completion, Citigroup will focus on five core businesses: U.S. personal banking, wealth management, investment banking, fixed-income and equity markets, and services, which includes the TTS business.

The transformation has been all about boosting returns. In 2024, Citigroup generated a 6.1% return on tangible common equity (ROTCE). However, management is targeting a 10% to 11% ROTCE by 2026. Analysts and investors seem more confident in this trajectory after the bank put up a 9.1% ROTCE in the first quarter of the year.

If Citigroup can start consistently generating a 10% or 11% ROTCE, with prospects of moving higher from there, the bank may finally begin to close the valuation gap with its peers.

C Price to Tangible Book Value data by YCharts

What to expect over the next three years

I think Citigroup's transformation is real. Over the next three years, I expect it to finish its international divestitures including the IPO of Banamex. I also expect the company to hit the long-awaited 10%-11% ROTCE in 2026. Deregulation in the banking sector and a simpler organization should lead to lower capital requirements, allowing Citigroup to increase capital returns to shareholders through dividends and share repurchases.

As you can see from the chart above, Citigroup doesn't need to do anything heroic to generate strong gains for shareholders. Its current TBV per share is about $90. A $145 stock price would only require a valuation of 1.5 times TBV, which would still be below peers. And remember, Citigroup should be able to continue to grow TBV per share in a meaningful way. I don't ever expect Citigroup to be JPMorgan Chase, but I do think it can continue to close the valuation gap over the next three years.

And who knows, perhaps once Citigroup achieves a better valuation -- and therefore a better stock currency -- it may start to think about whole bank acquisitions to bolster its U.S. deposit presence. That's speculative and still likely several years away, but also something for investors to consider.

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