Banks Mixed: Citigroup And Wells Fargo

Citigroup Inc. (C) and Wells Fargo & Company (WFC) are two of America's largest commercial banks and are still trying to find themselves as the commercial banking industry moves into the new era.

Both banks have gone through some rough times and are still managing themselves back to higher standards of performance.

In the second quarter of 2023, one of the banks, Wells Fargo & Co., saw some improvements in performance. The other, Citigroup, Inc., did not.

Wells Fargo posted an 11.4 percent Return on Equity and a 13.7 percent Return on Tangible Common Equity.

This is up from 7.2 percent and 8.7 percent one year ago.

Note that Wells Fargo is still operating under growth restrictions imposed in 2018 by the Federal Reserve in response to major wrongs done by the bank at an earlier time. These restraints are expected to continue through next year.

On the other side of the scale, Citigroup posted a 5.6 percent Return on Equity in the second quarter of 2023, down from 9.7 percent one year ago. In terms of its Return on Tangible Common Equity, Citi posted a 6.4 percent return this year as opposed to an 11.2 percent return last year.

In terms of equity positions, Citigroup has a CET 1 of 13.3 percent, up from 12.0 percent last year.

Note that Citigroup is "still battling to regain its footing a decade and a half" after the financial crisis connected with the Great Recession. Since 2021, when Jane Fraser took over as CEO, the bank has been going through a major restructuring.

Wells Fargo has a CET 1 (Common Equity Tier 1) of 10.7 percent this year, up from 10.4 percent one year ago. Citigroup has a CET 1 of 13.3 percent, up from 12.0 percent one year earlier.

Common Experience

Three things really stand out impacting the two banks (and also JPMorgan Chase & Co. (JPM)), during the second quarter.

On the negative side, the major commercial banks have seen a massive shortfall in revenues coming from investment banking sources and from stock and bond trading sources.

These shortfalls have been around for a while and are just a part of the economic environment that everyone is facing.

The third factor contributing to the performance of these banks is the rise in interest rate levels, an increase that is mainly attributed to the Federal Reserve and its battle against inflation.

All the major banks have experienced major upswings in the interest rates they can charge on loans.

Deposit rates have risen over the past 12 months, but have not risen by as much as loan rates have risen.

But, the stories for Citigroup and Wells Fargo experience a slightly different telling when it comes to the deposit area.

Citigroup has a deposit base that is much more sensitive to how deposit rates are changed.

For example, Citigroup, in being aware of the greater sensitivity of its deposits, has raised the average yield it is paying depositors "to just over 3 percent, up from about just over a half a percent a year ago."

And, "Citi, unlike other banks, did not see an outflow of deposits in the quarter."

Wells Fargo, on the other hand, was not as aggressive in the pricing of its deposits and, therefore, whereas commercial deposits have stabilized, "consumer deposits have dropped."

It is the case that in both banks, the net interest margins, the difference between the average loan rates and the average deposit cost, has risen, contributing to the overall performance of the banks.

Loan Losses

Both banks are preparing for an economic recession in the near future and, as a consequence, increased their provisions for loan losses.

Citigroup indicated that it had increased its provision for loan losses by nearly 40 percent, raising the amount to $1.8 billion.

Wells Fargo, particularly concerned about its commercial real estate loans, also bumped up its provision for loan losses to nearly $1.0 billion.

Conclusion

It appears both institutions are moving to meet their own organizational needs and hence are not directly comparable.

However, the future is not going to be easy.

For one, as suggested in my post on JPMorgan Chase & Co., Net Interest Margins are expected to drop and not by just a little bit.

The Federal Reserve will continue to raise interest rates this year. The indication is that the Fed will raise rates two more times this year.

But the deposit rates are expected to rise a little bit faster than the loan rates, resulting in a narrowing of the net interest margin.

This should result in lower deposit rates.

Investment banking revenues are not expected to pick up and trading activity should also remain low.

These large banks will continue to set aside funds for loan losses as the environment remains highly uncertain.

So, it doesn't seem likely that the performance of these two major banks is going to pick up much, if at all, this year.

And, they are certainly not in the healthy position that JPMorgan Chase is in.

However, I am projecting that the largest commercial banks in the United States will continue to perform adequately during the financial trials, something that I am projecting for the regional banks or the smaller banks.

For one, moving away from the largest commercial banks in the country ones finds that the small and medium-sized banks do not have the reserves of cash and readily marketable securities that the larger banks have.

Now, we wait for the earnings results of the other three large U.S. commercial banks.