2023-06-18 10:00:00 ET
Summary
- Citigroup has recovered by over +12% since the banking crisis, with its well-diversified portfolio ensuring the stickiness of its multinational client base.
- The bank has also narrowed its operating efficiency to 68.6% and adj ROTCE to 9.3%, nearing its medium-term target of ~60% and 11.5% at the midpoint.
- The upcoming FQ2'23 may be more telling of its exemplary execution, potentially demonstrating why it deserves its Big 4 status.
- Meanwhile, the elevated interest rate environment remains a headwind, given the expansion in credit losses and delinquency rates, despite the growth in its Net Income Margin.
- With the bullish market trend, investors may consider adding C here.
The Citi Investment Thesis Is Still Attractive Here
We have previously covered Citigroup Inc. ( C ) in March 2023, during the worst of the banking crisis. The bank stock sell-off earlier this year triggered a drastic plunge in its stock price to the pandemic and 8 Year lows, suggesting a highly attractive risk-reward ratio at that time.
C 3M Stock Price
True enough, C has recovered by over +12% since then, as similarly observed with other big bank stocks, such as JPMorgan (NYSE: JPM ) at over +14%, Bank of America (NYSE: BAC ) at over +8%, and Wells Fargo & Company (NYSE: WFC ) at over +16%. While the recovery is not complete yet, this cadence is significantly aided by the optimism surrounding the SPY bull run of over +20% since the October 2022 bottom.
The US Consumer Price Index By May 2023
CNBC
The May 2023 CPI has also moderated to 4% YoY, down from the 9% reported in June 2022. As a result of the optimistic development, the Fed finally paused the rate hike in June 2023, after 10 consecutive increases in 15 months.
While Jerome Powell may have guided to two more rate hikes in 2023, triggering an approximate terminal rate of 5.50% and 5.75%, we are not overly concerned for now, since the forward-looking stock market has already priced in an eventual pivot expected sometime in 2024 .
Naturally, it all depends on C's performance in the upcoming FQ2'23 earnings call by mid-July 2023, since it may be more telling of the bank's performance after the Silicon Valley Bank meltdown. Then again, we have already gathered optimistic hints from the management's commentaries thus far.
For example, the bank reiterated $1.03T of available liquidity resources ( -1.4% QoQ / +7% YoY), including $584.3B of HQLA (+1.5% QoQ/ +8.1% YoY) and 120% of LCR (+2 points QoQ/ +4 YoY) by the latest quarter.
Well, it remains to be seen if C may recoup the $5B of uninsured deposits previously made with First Republic Bank, a question that may be answered during JPM's upcoming earnings call.
Either way, the former's well-diversified portfolio remains highly strategic in ensuring the stickiness of its multinational client base, as best highlighted by Jane Fraser, CEO of C, in the recent earnings call:
Most of these deposits are particularly sticky because they sit in operating accounts that are fully integrated into how our multinational clients run their businesses around the world from their payrolls, their supply chains, their cash and liquidity management. 80% of these deposits are with clients who use all three of our integrated services: payments and collections, liquidity management and working capital solutions.
The data that we aggregate from these deposits and their related flows is fundamental to how our clients manage their efficiency, risk and compliance. And this greatly increases our deposit stickiness. It's also why nearly 80% of these deposits are from client relationships that are 15 years old or more. ( Seeking Alpha )
This is on top of C's sustained efforts in improving the operating efficiency to 68.6% (-12.4 points QoQ/ -3.5 YoY) and adj ROTCE to 9.3% (ex divestiture) by the latest quarter (+0.4 points QoQ/ +0.3 YoY). While there may still be a great distance from pre-pandemic levels of 64.2% and 12.1% in FY2019, respectively, the improvement from FY2022 levels of 73.3% and 8.9% is noticeable indeed.
Much of the success is attributed to the bank's efforts in divesting higher-cost businesses, such as the recent exit from 14 consumer banking countries, and optimizing operating expenses both in headcount and capex intensity, while similarly simplifying its management positions.
Perhaps that is why the CFO has recently reiterated FY2023 revenues of $78.5B (+11.2% YoY) and EBIT of $24.5B (+1.9% YoY) at the midpoint, suggesting an operating efficiency of 68.7% (-4.6 points YoY). Despite being dragged down by divestitures expenses, FDIC insurance costs, and one-time costs from the headcount reductions, the strength of the management's execution has been evident indeed.
Therefore, we remain confident that C may eventually achieve its medium-term operating efficiency of ~60% and ROTCE of 11.5% at the midpoint, especially aided by the planned Banamex IPO in 2025, as the macroeconomic outlook normalizes and operating costs are optimized.
Meanwhile, with the interest rates remaining high and inflationary pressure still elevated, we may see the delinquency rates, unfortunately, rise as the bank's charge-offs increase.
For example, C already reported an increase in the total consumer loan delinquencies, which are 90+ days past due at $2.37B (+10.2% QoQ/ +30.9% YoY), with a ratio of 0.76% (+0.08 points QoQ/ 0.13 YoY) by the latest quarter. This is on top of the growing Net Credit Losses and Ratios to $1.28B (+20.7% QoQ/ +52.1% YoY), with a ratio of 1.43% (+0.26 points QoQ/ 0.46 YoY).
In addition, the bank also made a higher allowance for credit losses on total loans at -$17.16B (+1.1% QoQ/ +11.5% YoY), with a percentage of 2.65% (+0.05 points QoQ/ +0.30 YoY).
While some of these numbers may still be lower than the FY2019 Consumer Loan Delinquencies ratio of 0.98% and Net Credit Losses Ratios of 2.49%, C investors must also note that the allowance for credit losses ratio has risen from the 1.84% reported then.
As a result, while the elevated interest rate environment may have triggered the bank's higher net interest income of $13.34B (in line QoQ/ +22.7% YoY), well balancing the credit losses thus far, it remains to be seen how long these macro headwinds may last, potentially putting pressure on its execution in the near term.
So, Is C Stock A Buy , Sell, or Hold?
C 5Y Stock Price
C seems to be retesting its previous resistance level of $49 in the near term, which is likely a non-issue due to the bullish market trend thus far. As a result, we may see the stock further rally to the next resistance level of $56s and settle there.
C 5Y P/E Valuations
C stock is also trading at an NTM P/E of 8.37x, down from its 5Y mean of 8.93x and still moderate compared to its big bank peers, suggesting its attractive risk-reward ratio.
Based on the market analysts' FY2025 adj EPS projection of $6.65 (ex-Banamex IPO) and the stock's NTM P/E of 8.37x, we are still looking at a price target of $55.66, suggesting a decent upside potential of +15.5% from current levels.
Therefore, we continue to rate C stock as a BUY here.
For further details see:
Citigroup: Optimizing Its Profit Curve To Achieve 60% Efficiency