DBSDF - Citigroup: Banks Are Back And This Is My Favorite

2023-10-20 05:42:05 ET

Summary

• Citigroup reported a decent increase in earnings in Q3 2023, but its stock price has slightly declined since the announcement.
• Despite a poorer future outlook, Citigroup's valuation and turnaround efforts make it a compelling buy.
• The bank's Q3 highlights include increased revenue and net income, strong performance in the ICG and PBWM segments, and positive future guidance.

Thesis Summary

Citigroup (C) recently announced its third-quarter results. The company reported a decent increase in earnings compared to the same quarter last year. But this impact on the stock needs to reflect better as Citi stock has slightly declined since it announced its results.

Despite showing good signs of recovery, C stock remains undervalued compared to peers due to a poorer future outlook.

However, I believe the compelling valuation, paired with the turnaround of the whole sector and specific measures C is putting into place, make this a compelling buy.

Third Quarter Highlights

The numbers show the company's performance was good in the third quarter of 2023. Citi reported revenue of $20.1 Billion, increasing 4% QoQ. Its net income is $3.5 Billion, surging 22% QoQ. The bank announced an EPS of $1.63 and $1.52 Ex-Div. The bank also announced a return of approximately $1.5 billion in shareholder value through common dividends and share buybacks.

In the 3rd quarter, both the ICG and PBWM segments of the bank showed good performance. Regarding the ICG segment, Q3 was TTS's highest revenue quarter in the last decade.

The services segment's cross-border transaction value increased by approximately 16% YoY. The bank's Securities Services revenue is also up by 16% YoY. AUC/AUA is at $23T, showing a 10% increase YoY.

The services segment gained around 80 bps of market share YoY in 1H23. 3Q was the ban's best quarter last decade for rates & currencies revenues. Fixed Income increased by 14% YoY. Its prime balances have surged YTD due to new client mandates and further engagement with existing clients. Investment Banking revenue increased 34% YoY, with a 12% rise when excluding marks. Debt Capital Markets saw a 40% growth QoQ.

Similarly, the PBWM segment of the bank showed excellent performance. US Personal Banking showed a fifth consecutive quarter of double-digit YoY revenue growth. The Bank's card interest-earning balances also grew double digits YoY. Citi's average loans increased by 13% YoY, and Branded Cards saw a 5% YoY increase in new account acquisitions.

Its wealth management segment shows a revenue increase of 2% YoY due to strong underlying business drivers. The company also announced the closing of the sale of Taiwan's consumer banking business.

Future Outlook

The Citi Group's full-year guidance looks promising. The bank announced a target of revenue between $78 and $79 billion. It expects the full-year net interest income, excluding markets, to increase from $46 billion to $47.5 billion. The bank expects to keep its expenses around $54 billion, excluding variables like 2023 divestiture-rated impacts and FDIC special assessment. The bank also promised modest buybacks in the fourth quarter of 2023.

After a few bad quarters, Citi seems to be on track to make some improvements. Looking at the numbers, the company seems to have already planned for a worst-case scenario with high loss reserves.

Moving forward, the company has reiterated their commitment to achieving a 5% CAGR, and laid out a clear plan to do so:

So deeper client relationships, more growth in terms of new clients that fit with our proposition fairly uniquely and some great megatrends that we are going to be riding and pretty uniquely positioned on. And we'll keep investing to make sure that we're -- where areas we're behind, we get into the full front of and the areas we are crushing it in like our win rate is 82% in TTS, and we're going to make sure that we continue to do so and innovate that way. So, sorry to be so excited about this, but this is -- the 4% to 5% just feels very, very doable to Mark and I.

In terms of profitability, the company also said in the earnings call that they expect to increase ROTC to 11-12%.

You'll have some of the benefit from further reduction in stranded costs, which we've been keenly focused on as we've exited each of these. And then I think as we get to the medium term, you will start to see some of the benefits from the transformation spend and investments that we would have made start to play out as well as efficiencies that we start to get in a lower structural cost base. But again, that's in that medium-term period.

Source: Earnings Call

Peer Comparison

The Citi stock's valuation ratios show its intriguing position compared to its industry peers, like ICICI Bank Limited (IBN), BNP Paribas (BNPQY), Sumitomo Mitsui Financial (SMFG), DBS Group (DBSDY) , and Mitsubishi UFJ Financial Group. If we look at its P/E ratio (ttm), Citi has a P/E ratio (ttm) of 6.57 is lower than the rest of its peers. It suggests an undervaluation or the market has more subdued expectations. IBN has the highest ratio, suggesting a premium valuation based on elevated growth performance.

Its price-to-sales ratio (ttm) depicts the same picture. Citi's P/S ratio is 1.12 and suggests that relative to its sales, Citi's stock price is rather modest. Here, IBN again leads with the highest ratio and reflects overvaluation or strong growth expectations. The position of Citi's stock is average and shows undervaluation.

The price-to-book ratio (ttm) of Citi stock again more or less presents the same picture. Its ratio is 0.42, and its C stock price is incredibly low compared to book value. This could be a good opportunity for investors to buy its stock. Similarly, it also suggests closely examining the bank's assets and growth prospects. IBN's significantly higher P/B ratio, juxtaposed with the rest of the group hovering between 0.61 and 1.53, underscores the market's varying perceptions about these companies' assets and growth trajectories.

Citi's revenue growth is modest and lags behind its peers in the industry, which include MUFG, IBN, SMFG, and DBSDY, on a YoY basis.

We can see that C is noticeably behind its peers in terms of both growth and profitability. Three-year CAGR is 8.39%. Also, the net income margin is the lowest of the group, at 18.87%.

Citi appears to have a lower valuation than its peers, especially considering the P/E and Price Book ratios. This could suggest that C stock is undervalued or that the market has different growth or risk expectations than its peers.

Valuation

Citi's revenue has surged this quarter, and according to the bank, it was their best quarter in the last decade. The bank achieved significant milestones this quarter and aims to achieve more by the end of this fiscal year.

Citi's EPS is expected to decline this year and the next, but after that, it will surge with a skyrocketing percentage. This fiscal year, it is expected to reach 5.90, declining 17.05%, and the next year it will be around 5.87. In 2025, it is expected to surge by 17% to 6.88, followed by 8.96 in 2026, increasing by 30%.

On the other hand, its revenue is expected to surge, but it will take a blow after that. This fiscal year, it is expected to surge by 5.5% to reach a total revenue of $79.55 billion. Next year it is expected to decline next year as shown in the graph. The revenue growth each year is expected to remain modest.

In order to catch up with its peers, C stocks would have to appreciate around 30%.

Risks

As a large bank in the industry, it has certain risks that can impact it. First, if we look at its valuation, there are potential risks. Its low P/E, P/S, and P/B ratios suggest that the market might be discounting its future growth potential or is expecting higher risk than its peers in the banking sector.

Another risk could be its modest revenue growth. Citi's YoY revenue growth and 5-year CAGR are low compared to its peers. This indicates that Citi might need help to increase its revenue or capture market share.

Rising interest rates are also a potential threat to the bank. If interest rates rise, then banks are bound to charge more. So, in this case, Citi's Net Interest Margin will increase.

Another risk that can significantly affect its performance is competitive risks, as there are chances that Citi could be outpaced by its peers in the industry. Operational risks, general risks for the banking industry, and technological risks are also important to remember.

Conclusion

Citigroup Inc. reported a strong performance in the third quarter. Despite its good performance, its stock price remained low. C trades at a discount to its peers, and there's a good reason for this. However, as the market begins to turn, and the company implements improvement measures, I think we could see C recover and outperform the overall sector.

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