2023-03-20 14:45:33 ET
Summary
- The recent sell-off of bank stocks has triggered a drastic plunge in Citigroup's stock price to its pandemic and 8 Year lows, suggesting an improved margin of safety to our price target.
- The bank also boasted an excellent Liquidity Coverage Ratio [LCR] of 118% in the latest quarter, with an ambitious RoTCE target of 12% in the intermediate term.
- Combined with the influx of new customers/deposits over the past week, we reckon C's available liquidity sources remain more than robust no matter the macro outlook.
C's Investment Thesis Remains Robust Here
Citigroup Inc. ( C ) has demonstrated its mettle as one of the big banks in the US, by pledging $5B of deposits to First Republic (NYSE: FRC ), along with other banks. We reckon the risks may be well-contained in the short term, since the deposits are only obligated to stay for at least 120 days.
On one hand, investors must note C's elevated unrealized loss-to-equity ratio of 18.9%, compared to its big bank peers, such as JPMorgan (NYSE: JPM ) at 5.6%, Bank of America (NYSE: BAC ) at 7.2%, and Wells Fargo & Company (NYSE: WFC ) at 6.9%.
This was likely attributed to its expanding unrealized losses of $6.6B (+180.7% YoY) in available-for-sale [AFS] securities and $25.31B (+859.3% YoY) in held-to-maturity [HTM] debt securities in FY2022.
On the other hand, there were few risks to C realizing these losses, due to its similarly increasing total end-of-period deposits to $1.36T (+3.8% YoY), comprising $730.12B (+4% YoY) in the US and $635.82B (+3.3% YoY) internationally in the latest fiscal year.
Particularly, the bulk of its deposits were attributed to the Institutional Clients Group [ICG] at 62%/ $848B (+3.7% YoY), with Personal Banking and Wealth Management [PBWM] comprising most of the balance at 31.5%/ $431B (in line YoY).
Further breaking it down, Treasury and Trade Solutions [TTS] and Securities Services comprised $823B (in line YoY) of these deposits. This suggests C's excellent relationship with its institutional clients and the consequent capital financing, compared to retail banking with $113B of deposits in FY2022.
Therefore, while the bank might report up to $1.16T (+7.4% YoY) of deposits as uninsured, suggesting a heightened ratio of 85.2% similar to SVB Financial (NASDAQ: SIVB ) at 88%, and elevated against JPM at 56%, BAC at 37.9% , and WFC at 36.8% in FY2022, this was not a major concern at all in our view.
We are also cautiously optimistic about C's performance moving forward, due to its excellent liquidity. The bank reported $575.2B (+3.7% YoY) of High-Quality Liquid Assets [HQLA], comprising $245.5B (-4.1% YoY) of cash by the latest fiscal year. This helped with its expanding Liquidity Coverage Ratio [LCR] of 118% (+3 points YoY), allowing it to adequately fund cash outflows "over a prospective 30 calendar-day period of significant stress."
These numbers were stellar indeed, given the minimum US requirement of 100%, compared to JPM at 112% (+1 points YoY), BAC at 120% (+5% YoY), and WFC at 122% (+4 points YoY). Particularly, C also reported that it had approximately $1.04T (+8.2% YoY) of available liquidity sources, including additional unencumbered securities, further bolstering its position as one of the biggest banks in the US.
Combined with the influx of new customers and deposits over the past week, we reckon C's prospects remain promising ahead, potentially boosting its Net Interest Income [NII] beyond the original guidance of up to $45B (-7.5% YoY) in FY2023 .
Furthermore, the bank has an ambitious three-to-five-year target of up to 12% in non-GAAP Return on average Tangible Common Equity [RoTCE], suggesting a notable expansion in profitability by 3.1 points from FY2022 levels of 8.9%.
Particularly, its business model was resilient as well, due to its smaller and safer nature after the previous financial crisis in 2008, as highlighted by Jane Fraser, CEO of C, in the FQ4'20 earnings call:
He (Michael Corbat, previous CEO) had to make tough calls, steering the company through the post-crisis restructuring. He made Citi a simpler, smaller, safer and far stronger institution, returning it to growth, closing the gap with our peers and returning a significant amount of capital to our shareholders just as he promised he would. ( Seeking Alpha )
Much of these were translated into the constant divestitures of the bank's Legacy Franchises (including Consumer Banking) and growing focus on institutional businesses, on top of wealth management.
Therefore, it made sense that C's ICG segment comprised 54.6% of its revenues in FY2022 at $41.2B (+3.4% YoY), similarly contributing 72.3% of the bank's total net income at $10.73B (-24.9% YoY). This was compared to the PBWM segment delivering FY2022 revenues of $24.21B (+3.8% YoY), while commanding 22.3% of its total net income at $3.31B (-57.1% YoY).
Combined with the excellent risk management in the corporate credit portfolio, with only 20% concentrated in the transportation/industrial sector and 12% in the tech/ media/ telecom sectors, we reckon C's business model is looking more than resilient in the face of an uncertain macroeconomic outlook.
So, Is C Stock A Buy , Sell, or Hold?
C 1Y EV/Revenue and P/E Valuations
C is currently trading at an EV/NTM Revenue of 1.11x and NTM P/E of 7.53x, lower than its 3Y pre-pandemic mean of 2.30x and 10.30x, respectively. Otherwise, it is relatively in line with its 1Y mean of 1.27x and 7.53x, respectively.
Based on its projected FY2024 EPS of $6.95 and current P/E valuations, we are looking at a moderate price target of $52.33, suggesting an excellent upside potential of 18.25% from current levels. Otherwise, based on its pre-pandemic P/E valuations, we are looking at an aggressive price target of $71.58, near its August 2021 top.
C 3Y Stock Price
The recent pessimism has impacted C's stock prices, drastically pulling back from its previous February 2023 resistance level and likely testing its October 2022 support level of $40 soon.
Based on the bank's historical cadence of annual dividend payout s at $2.04 since 2020, we reckon 2023 may be similar, attributed to the uncertain macroeconomic outlook, suggesting a stellar forward yield of 5.1% for those who add at $40. This naturally implies a tremendous expansion from the 4Y average of 3.46% and sector median of 3.04%.
Combined with the fact that it is trading below its 50-day moving averages, we reckon the stock has been oversold and looks very attractive at these levels, nearing its pandemic and 8Y lows. Therefore, we recommend investors add C stock here.
For further details see:
Citigroup: Why The Stock Is A Gift Near 8-Year Lows