2023-06-16 11:35:20 ET
Summary
- Citigroup presents a unique investment opportunity with a mix of risk and potential reward due to its low price-to-earnings and price-to-book ratios.
- The appearance of an inverted head and shoulders pattern is indicative of a bullish trend, hinting at a potential robust market rally.
- Technical analysis shows potential for an upward trend in Citigroup's stock price, with a breakout above $52 possibly triggering a significant rally.
In an era marked by global economic uncertainties and banking industry challenges, Citigroup Inc. ( C ), under the leadership of CEO Jane Fraser, presents a unique investment opportunity characterized by an intriguing mix of risk and potential reward. Despite having some of the banking sector's lowest price-to-earnings ((PE)) and price-to-book ((PB)) ratios, the bank's strategic restructuring efforts suggest the onset of a transformative phase. This piece offers an in-depth technical analysis of Citigroup's stock price, providing insights into potential future trends. It is noted that Citigroup's stock price is currently navigating a long-term consolidation phase, with the stock currently exchanging hands at lower levels, hinting at a possible surge from this support zone. The appearance of an inverted head and shoulders pattern bolsters the bullish perspective, suggesting a potential upward momentum.
Financial Performance
While Citigroup, a recognized player in the banking sector, currently exhibits diminished appeal among investors due to its particularly low PE and PB ratios, this scenario also presents a unique opportunity for investors seeking value. Citigroup, under CEO Jane Fraser's leadership, is navigating challenging waters toward a significant turnaround. While Citigroup may seem comparable to rivals like Bank of America ( BAC ) and Wells Fargo ( WFC ), it differentiates itself by possessing a significant global clientele, even with a smaller number of U.S. branches. Even with some roadblocks, such as the failed sale of Mexico's Banamex , Citigroup is showcasing newfound strategic boldness. Fraser's expansion strategies in wealth management, bond trading successes, and ambition to become a premier banking partner for institutions with international needs suggest a transformative phase for the bank. These developments position Citigroup as an interesting opportunity for long-term investors who anticipate substantial growth.
Despite this, Citigroup's shares reflect some of the lowest valuations in years, trading at just 6.7 times their trailing 12-month earnings as seen in the chart below. The shares are valued at only 7.6 times this year's projected profits and 7.5 times next year's likely earnings per share, maintaining low forward-looking price measures. Its price-to-book value, also under 0.5, is at a multi-year low and is significantly lower than competitors like Bank of America and Wells Fargo.
The low valuations largely stem from Citigroup's comparatively modest returns on its assets. Last quarter, for instance, Citigroup reported a 9.5% return on equity (ROE), lagging behind both Bank of America's 12.5% and Wells Fargo's 11.7%. However, these figures could improve under Fraser's revitalization efforts, which focus on areas such as overseas consumer banking and untapped cross-border payment opportunities.
The apparent low valuation of Citigroup raises questions about the success of its current transformation efforts. However, the bank's strategic moves, including the streamlining of overseas consumer banks, the expansion of domestic market share, growth in wealth management, and deeper penetration into the cross-border market, could turn Citigroup into an attractive investment if realized successfully. Despite economic sluggishness and a weakening lending market overshadowing early progress, Citigroup may still present a profitable opportunity for risk-tolerant, income-minded investors, particularly with its impressive dividend yield of 4.2%.
Moreover, Citigroup's Q1 2023 performance shows promising signs of growth, with net income reaching $4.606 billion. This demonstrates an upward trend in profitability and the potential positive impact of the bank's ongoing restructuring efforts. Coupled with robust earnings per share ((EPS)) of $2.19, these figures underscore Citigroup's financial resilience and potential for future growth. However, investors should be prepared for market volatility as reactions to Citigroup's restructuring efforts continue.
Technical Outlook and Historical Overview
Examining Citigroup's bullish fundamental forecast aligns with the technical perspective, hinting at an upward potential in the stock price. The monthly chart below exhibits Citigroup's price patterns remaining within a consolidation phase. The substantial fall in Citigroup's stock price during the Great Recession - from a high of $417.75 to a low of $7.86 - resulted from the extreme financial crisis impacting the global banking system. The collapse of the subprime mortgage market, which significantly influenced this crisis, had a profound effect on Citigroup due to their considerable investment in mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) tied to American housing prices. When the housing market collapsed, these securities lost value, leading to substantial losses.
A multitude of bad loans that resulted from lax lending standards during the housing boom were bundled into these MBS and CDOs. With homeowners defaulting on their mortgages in large numbers, banks were forced to write off these loans, causing further losses. The financial crisis also triggered a severe global recession, leading to reduced borrowing and spending by businesses and consumers. This slowdown in banking activity compounded the damage to Citigroup's earnings and stock price. In the subsequent years, Citigroup had to offload non-core assets, exit certain markets, and reorganize its operations to enhance its financial health. While these measures were necessary for the bank's survival, they led to slower growth.
The monthly chart for Citigroup shows that the stock price entered a consolidation phase following the Great Recession. The blue channel line has guided Citigroup's path post-recession. Rebounds from this line have presented attractive buying opportunities for long-term investors, although the price remains capped within the blue channel. Unlike other banks such as Bank of America, Citigroup's recovery has been slower due to its significant exposure to the subprime mortgage market through its MBS and CDO investments. Citigroup has also been hit with numerous regulatory penalties and lawsuits related to its pre-crisis activities, which have both financially and reputationally impacted the bank. At present, the price is consolidating at the blue channel line, indicating a strong support region. A break above $52 could trigger the next rally for Citigroup.
The Emergence of Bullish Price Structure
To better comprehend Citigroup's price structure, the weekly chart is examined below. It shows that the price has been consolidating in wide ranges, signifying increased market volatility. This heightened volatility has resulted in a strong inverted head and shoulders pattern that will only be validated if the market closes above $52 on a monthly basis. This level serves as the neckline for this pattern. It's noteworthy that every time the price reaches lower levels, it rebounds higher, resulting in the formation of bullish wicks on the weekly chart. These bullish wicks indicate a favorable market trend and suggest a rise in prices. However, a confirmed breakout above $52 is required to affirm a bullish perspective. The RSI level, which is already broken on the weekly chart and lies above 50, adds another hint of a possible bullish breakout.
Key Takeaways for Investors
The bullish implications for the investors and traders are observed in the daily chart below. The price behavior on the daily chart further strengthens the bullish case, as the price is bouncing higher on its every correction producing multiple wicks on the daily chart. This kind of situation presents a bullish case for Citigroup and indicates that any breakout above $52 would be the indication of the launch of the next rally. Investors must consider buying Citigroup on any correction or any dips. While investors can also consider buying Citigroup if the price breaks above $52.
Risk Factors
The lower-than-average PE and PB ratios for Citigroup could be interpreted as a lack of confidence from investors. Such figures could be seen as potential opportunities for value-driven investors, but they also hint that the market views Citigroup as more precarious compared to its industry peers. This perspective could restrict the range of interested investors and impact the liquidity of Citigroup's shares. Additionally, the ongoing corporate restructuring, steered by CEO Jane Fraser, is a massive venture that carries inherent risks. Although the goal of these efforts is to amplify Citigroup's profitability and streamline its operations, the outcome is uncertain. Possible disruptions, excess costs, or unforeseen challenges could transpire throughout this process, detrimentally affecting Citigroup's financial standing.
From a technical perspective, Citigroup's share price is experiencing broad fluctuations, and it has yet to break the inverted head and shoulder patterns. If the price fails to surpass $52 by closing the monthly candle above this threshold, the trend will remain in a consolidation phase. Conversely, a breakout below $38.70 would invalidate the bullish outlook and potentially trigger a further decline in Citigroup's stock price.
Final Thoughts
The above discussion suggests that Citigroup's stock price continues to hover in a period of consolidation. Yet, the strength of the price behavior is emphasized by the appearance of bullish wicks across monthly, weekly, and daily charts. Together with the emergence of an inverted head and shoulders pattern, the price structure strongly indicates potential for future growth.
The stock price is currently hovering near the critical threshold of $52. A monthly close above this level would signify a confirmed breakout, likely triggering a significant upward rally. As the price is moving within the bounds of a blue channel, any upward movement could potentially peak between $80-$90. A surge above this level would instigate a considerable increase in Citigroup's stock price. Given these findings, investors are advised to consider buying Citigroup shares during any market correction or at the point of a $52 breakout.
For further details see:
Citigroup: Buy The Breakout (Technical Analysis)