While preferred shares issued by banks and financial institutions typically don’t require making up for missed dividend payments, the negative perception of missing a preferred dividend is a major concern for banks like Citigroup (NYSE:C). To avoid reputational damage, banks strive to prevent missed dividend payments at any cost.
A Closer Look at Citigroup’s Q3 Results
Before analyzing Citigroup’s preferred shares, let’s evaluate the bank’s performance in the third quarter. The bank’s net interest income remained stable, with a 3.5% increase from the first quarter and a marginal 0.5% decrease from the second quarter. Total non-interest revenue also grew by approximately 14%, thanks to increased revenue from principal transactions. As a result, Citigroup reported a total revenue of $20.1 billion, a 4% quarter-over-quarter increase. The cost structure remained controlled, and the bank’s pre-tax income reached $4.8 billion, even after considering credit loss provisions of $1.84 billion.
After accounting for taxes and non-controlling interests, Citigroup’s net profit for the third quarter amounted to $3.55 billion. However, after deducting preferred dividends of $333 million, the net income attributable to common shareholders was $3.17 billion, equivalent to approximately $1.63 per share.
Notably, Citigroup’s Common Equity Tier 1 (CET1) ratio continued to strengthen, reaching 13.5%, significantly exceeding the regulatory requirement. The solid CET1 ratio positions the bank well to navigate through challenging market conditions. Additionally, the tangible book value per share increased to $86.90, reflecting steady progress.
Additional Clarity on the Use of SOFR and Its Impact
As Citigroup began transitioning from LIBOR to the SOFR benchmark rate for floating rate dividends, it made the necessary adjustments to its preferred shares. The bank’s decision to follow industry guidelines helps avoid reputational damage, even if it means higher costs. Consequently, Citigroup has called its Series K preferred shares, rationalizing the decision as the quarterly reset of the preferred dividend would have significantly increased the bank’s expenses. The calling of Series K shares suggests that other preferred shares, such as the Series J, may also be called in the future.
Investment Thesis: Strength and Potential of Citigroup
Citigroup’s financial performance outperforms its current stock price suggests, with a full-year EPS expected to exceed $6, resulting in an earnings multiple of less than 7x. Additionally, the bank’s robust capital retention strategy strengthens its capital ratios, with regular improvements observed in the CET1 ratio. With the stock trading at approximately 55% below its tangible value, Citigroup’s common shares, as well as some of its preferred shares, appear attractive. While the writer does not currently hold any positions in Citigroup, they are closely monitoring the bank’s performance.
