Citigroup's M&A Fee Surge Masks Persistent Profitability Concerns

What happened

Citigroup reported fourth-quarter 2025 earnings with an 84% jump in M&A fees, driven by near-record deal activity and contributing to record revenues. This performance highlights the bank's competitive strength in investment banking during a robust market. However, the DeepValue report notes that Citigroup's stock has already rerated approximately 57% over the past year, trading near book value with a P/B of 0.95x. Despite the revenue boost, return on equity remains weak at around 6%, likely below its cost of equity, and free cash flow is highly volatile. The earnings beat does not fundamentally change the investment stance, as upside still depends on successful execution of complex transformation initiatives like the Banamex exit and cost cuts.

Implication

The 84% increase in M&A fees underscores Citigroup's ability to capitalize on strong market conditions, likely supporting short-term revenue and sentiment. However, this growth is cyclical and does not signal a sustainable improvement in profitability, with RoE stuck at 6% and below the cost of capital. The DeepValue report cautions that the stock's recent rally has eroded the deep-value discount, reducing the margin of safety. Key risks, such as the Banamex separation and regulatory hurdles, remain unresolved and could derail the transformation. Therefore, investors should view this news as a temporary positive, maintaining a wait-and-see approach until evidence of sustained RoE improvement and execution milestones emerges.

Thesis delta

The strong M&A fee performance confirms Citigroup's revenue potential in favorable markets but does not alter the core investment thesis. The stock remains fairly valued after its rally, and the thesis still hinges on successful execution of the multi-year transformation to boost returns on equity. Investors should await clearer progress on cost savings, Banamex exit, and regulatory remediation before considering a more bullish stance.