Will Unloved Citigroup Inc (C) Get Out Of Its Own Way?

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Citigroup Inc (NYSE:C) stock has lost about 8.7% in the current year. This came on the back of a 3.8% upside in the whole of the year 2014. In the same period, the broader index S&P 500 recorded a gain of 0.5% and 11.4% respectively. Clearly, it suggests that the stock was an underperformer at least in the last one year period. What was the reason that it began to underperform? Does the current price look attractive to enter the counter? Did the management fail to convince investors’ of its potential? There are a lot of questions that need to be probed to justify any opinion.

Legal Charges

If Citigroup Inc (NYSE:C) was not among the favorite stocks, then there should be some unfavorable factors that prevent it from scaling higher. Alternatively, some big investors’ might prefer to avoid the stock for other reasons.

The financial companies stocks suffered a negative sentiment in the current year after big companies like Citigroup or JPMorgan Chase & Co. (NYSE:JPM) recorded hefty charges in their fourth quarter results. Some of the big companies also failed to meet the analysts’ estimations of earnings resulting in the dragging down of the stock. Even in the third quarter, these financial companies had to allocate funds for legal charges. This impacted the stock performance of the companies, who have recorded charges.

Following the financial imbroglio in 2008, Citigroup Inc (NYSE:C) did well to return the money it took from the government. The company preferred to divest some of the units to pay back the government.

Unfavorable Factors

However, there were some unfavorable factors that were hurting the stock. For instance, the company failed the Federal Reserve’s CCAR stress test in March 2012, as well as 2014. However, Citigroup managed to pass the CCAR test in March 2013 and the makeup test in September 2012. The company will again undergo the CCAR test in the current year, probably next month. Its CFO, John Gerspach, was fully aware that the management was keen on ensuring that the bank passes the test.

Another factor is the dividend. The company wants to lift the dividend rate from the current one cent a share apart from launching a share buyback program to boost its book value. However, the Fed has turned down its request at least two times in the past.

Some analysts’ and brokerages have called upon the Central Bank to allow Citigroup to buy back a minimum of $1 billion worth of its share, i.e. before the stock price vaulted more than 80%. Similarly, they also wanted the Fed to lift its dividend payout ratio to 10% from the current 1% for every quarter. The Central Bank rejected it.

Factors To Consider

While it is true that every bank had to allocate funds for legal charges to settle issues related to mortgage securities, the fact is that it will not recur again. Also, it removes the uncertainties hanging over until the process is completed. Citigroup’s legal fees and repositioning amounted to $7.396 billion in 2014. Despite a lower interest rate, its revenue advanced 1% in the year 2014.

Asset Summary

Citigroup shut down 95 operational sites, slashed its workforce by more than 10,000 FTEs, and closed its consumer business sale in Spain and Greece. It iss also making good progress in selling OneMain Financial and launching an IPO. The company believes that OneMain was not a perfect fit to its scheme of things since its focus was to cater to affluent clients.

Citi Holdings turned profitable for the full year 2014 while the company used about $3.1 billion of its deferred tax assets. The company streamlined its consumer, as well as institutional franchises for better returns. Its North American Consumer continued to perform well while international divisions showed modest growth. The bank’s treasury and trade solutions continued to witness growth in volumes, as well as fees.

Basel III

Citigroup generated close to $11 billion in regulatory capital in the year 2014 with a Basel III Common Equity Tier one capital ratio of 10.5%. The company estimates the Basel III Supplementary leverage ratio to be 6.0%. The company was committed in achieving its targets for 2015 and returning capital to its shareholders. It might be able to hike the dividend rate and launch share buyback program once it passes the CCAR test. The current share price is more than 20% below the book value.

Analyst Comments

Deutsche Bank upgraded Citigroup shares to ‘Buy’ from ‘Hold.’ The brokerage thinks that the bank wwill be able to get an approval for a $4 billion share buyback program from the Fed after the CCAR test. The company’s CEO, Michael Corbat, is in the chair with the task of getting the Fed approval for share repurchase this year.

Another catalyst was the IPO of OneMain Financial. The brokerage also believes that the biggest increases in capital returns will come from Citigroup followed by Bank of America Corp (NYSE:BAC) and others.

DTA

Another analyst from S&P Capital IQ, Erik Oja, says that of the four units of Citigroup, two units, Citi Holdings, and Investment Banking, achieved a growth of 28.5% and 4.6% respectively. Their share of revenue was 8% and 22% of the total revenue. The other two units, Markets and Fixed-income markets, fell 8.1% and 11% respectively due to weak liquidity, especially in the December quarter.

Erik Oja expects legal costs to moderate in the current year and estimates an efficiency ratio of 65%, which will be more or less in line with its rivals. The brokerage projects EPS of $5.35 in the current year and $6.38 next year. Analyst Oja has kept a price tag of $59 with a rating of ‘Buy’ on Citigroup shares.

Conclusion

There appears to be unanimity among analysts’ that Citigroup Inc (NYSE:C) will finally be able to launch its share buyback program in the current year. This should boost its book value, which is a vital parameter for financial stocks. Additionally, no analyst is recommending the stock as ‘Sell.’ Considering that the book value is higher than the current market price and other factors, the stock might come back to investors’ favorites. They seem to be waiting for CAAR test.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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