Morgan Stanley says ‘crown jewel’ of Citi is worth half the bank’s value

Citigroup Inc. hosted its annual investor day this week, with a big push from CEO Jane Fraser to redefine how it's biggest segment, services, is valued. Apparently, it worked, as Morgan Stanley analysts today pinned the value of Citi's services segment, which includes many of the payment rails that connect global finance, to about $56 billion ($30 per share)—nearly half the bank’s entire value. Citi’s market cap is currently $115.8 billion.

The segment, which includes what Citi calls Treasury and Trade Solutions such as liquidity management, and Securities Services, like custody and fund services, transacts about $5 trillion a day for clients including Microsoft, Walmart, and Stripe according to the Morgan Stanley report.

“The bank views Services as its crown jewel located at the heart of Citi’s global network,” wrote report authors, and equity analysts Betsy L. Graseck and Ryan Kenny.

The authors found that Citi’s Services segment’s Return on Average Tangible Common Shareholders' Equity (ROTCE)—a metric that divides annualized net earnings by average monthly tangible common shareholders' equity—has between between 21 percent and 23 percent over the last 3 quarters, the highest of any Citi segment.

Citi believes that continued growth in the volume of the segment can offset headwinds from lower rates. “Specifically," the report's authors note, "Citi highlighted expectations for continued strength in cross-border transactions, US dollar clearing volumes, commercial card volumes, and trade loans.”

In spite of the higher-than-expected returns Citi maintained its ROTCE target of between about 11 percent and 12 percent until 2026, with revenue increasing 4 percent to 5 percent compounded annually.

Earlier this week, Citi hosted a full day of presentations just on services, reintroducing Wall Street to what the Wall Street Journal described as a "collection of functions most big companies couldn’t do without," and which could increase the value of Citi's stock if accounted for differently. While Citi’s stock has increased 14 percent this year to $60.62, analysts at Oppenheimer and Wells Fargo have the stock marked to buy with a target price of $86.00 and $85.00 respectively.

Last week Citi’s acting CIO told Fortune he expects a calmer than expected economy will help reduce the impact of rapid artificial intelligence adoption on the jobs market.

This story was originally featured on Fortune.com

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