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Citi's Most Read – Financials & FinTech Summary (June 2 - June 8)

Core Content Overview

This summary highlights key insights from Citi Research's recent reports on the Financials & FinTech Global Super-Sector, focusing on UK and US banks, Australian banks and diversified metals & mining, and the potential Pekao-PZU merger. The reports provide analysis on financial performance, strategic moves, and investment recommendations.

Key Sectors and Themes

UK Banks

• Performance: UK banks have seen year-to-date gains between 11-41%. Lloyds & Natwest were the best performers.
• Earnings: Four of the five banks reported 1Q25 pre-provision profit beats, with HSBC and Natwest leading.
• HIBOR Moves: Recent HIBOR changes have implications for HSBC and Standard Chartered. Natwest is seen as having the greatest upside to consensus and target RoTEs.
• Investment Rating: Citi's rank order is NWG (Buy) > HSBC (Buy) > BARC (Buy) > STAN (Neutral/H) > LLOY (Neutral).

US Banks

• Executive Compensation: Citi analyzed CEO compensation frameworks across US banks to assess alignment with shareholder interests. Best-in-class plans are characterized by transparency, significant equity components, and performance targets aligned with medium-term outlook.
• Wells Fargo: The removal of the asset cap is positive but largely priced into the stock. The bank can now take on more commercial deposits and use balance sheet for trading growth. However, we do not expect immediate benefits to loan growth or expense efficiencies.
• Investment Rating: Neutral, with a target price of US$78.00.

Australian Banks and Diversified Metals & Mining

• Sector Tilt: Banks and materials account for ~45% of the Australian market. Banks have outperformed materials over the past 18 months, but fundamentals suggest the trend may be unsustainable.
• Valuation: Materials appear more undervalued with earnings growth, while banks have higher valuations.
• Investment Rating: Citi rates BHP as a Buy, while NAB and CBA are Sell. The sector is viewed as a "lopsided barbell" with material risk.

Bank Mandiri (BMRI.JK)

• Potential Spin-Off: There is a possibility that Bank Syariah Indonesia (BRIS) may be spun off from Bank Mandiri, BBRI, and BBNI, and placed under Danantara.
• Impact: This could unlock value and generate a special dividend, though future earnings growth might moderate. Investment rating: Buy, with a target price of Rp6300.0.

Australian Securities Exchange (ASX.AX)

• Restructuring: ASX is in its third year of a five-year strategy. The focus on Horizon 2 growth opportunities is expected to increase.
• Investment Rating: Neutral, with a target price of A$71.20.

Investment Recommendations

Main Points of Analysis

• UK Banks: Natwest, HSBC, and Barclays are highlighted for their potential to outperform, with a focus on earnings upside and strategic moves.
• US Banks: Wells Fargo's asset cap removal is viewed positively but not as a catalyst for new gains.
• Australian Market: A shift in sector performance is expected, with materials showing better fundamentals and potential for growth.
• Pekao-PZU Merger: The merger may free up capital, but uncertainty around capital distribution and share parity could limit share price reaction.
• Bank Mandiri: Spin-off of BRIS could unlock value, though earnings growth may be affected.
• ASX: Restructuring efforts are ongoing, with regulatory and cost management risks still present.

Key Figures and Data

• UK Domestic Banks:
  • Barclays: 2025E Adj. PBT = 9,111; 2027E = 11,288
  • Lloyds: 2025E Adj. PBT = 7,230; 2027E = 9,098
  • Natwest: 2025E Adj. PBT = 7,615; 2027E = 9,638
• UK International Banks:
  • HSBC: 2025E Adj. PBT = 34,848; 2027E = 37,660
  • Standard Chartered: 2025E Adj. PBT = 7,137; 2027E = 7,879
• Australia Banks and Materials:
  • BHP: Buy rating
  • NAB and CBA: Sell ratings
  • BRIS: Potential spin-off from Bank Mandiri

Important Disclosures

• Citi Research analysts certify that the views expressed reflect their personal opinions and were prepared independently.
• Analyst compensation is not linked to specific recommendations.
• The Firm may act as a liquidity provider or market maker in the financial instruments mentioned.
• Investment ratings are based on expected total returns and risk, and may be suspended or under review for regulatory or internal reasons.
• Catalyst Watch and Short Term Views (STV) are separate from fundamental equity ratings and do not imply a buy/sell recommendation.

Conclusion

Citi Research provides insights into the performance and strategic moves of major banks and financial institutions in the UK, US, and Australia. The reports highlight the potential for upside in certain banks and caution against overexposure in others due to valuation and risk factors. Investment recommendations are based on a combination of earnings expectations, capital structure, and market dynamics.