Citi's Transformation Risks Amplified by Trump's Credit Card Rate Cap Proposal

What happened

U.S. President Donald Trump's call for a one-year cap on credit card interest rates at 10% has triggered premarket declines for major banks, including Citigroup. Citi, with its substantial U.S. consumer banking operations, is already navigating a complex multi-year transformation aimed at boosting its weak return on equity, which remains around 6%. The stock slide reflects immediate investor fears that such a cap could compress net interest margins, a critical revenue source for Citi's consumer segment. DeepValue's prior analysis highlighted Citi's sharp 57% rerating over 12 months to trade near book value, leaving little deep-value discount and emphasizing execution and regulatory risks. This political development layers additional uncertainty onto Citi's already precarious path to sustainable profitability, compounding existing headwinds from its restructuring efforts.

Implication

If implemented, the cap could directly reduce net interest income from credit cards, pressuring Citi's ability to achieve targeted RoE improvements crucial for justifying its current valuation. This exacerbates the bank's struggle to reach cost-of-equity returns, as highlighted in DeepValue's 'WAIT' stance due to already balanced risk/reward. Management's transformation efforts, including job cuts and tech investments, may be offset by these revenue pressures, delaying progress on RoE targets. Investors must now factor in heightened political risk, which could lead to increased stock volatility and potential earnings downgrades. Consequently, the investment case weakens further, emphasizing the need for evidence of execution success or a better entry price before considering new capital.

Thesis delta

The proposal introduces a new near-term political risk that could directly impair Citi's consumer banking profitability, adding to the regulatory overhangs already noted. While the core thesis of transformation-dependent upside remains unchanged, the margin of safety is further eroded by potential revenue headwinds, making the 'WAIT' recommendation more prudent.