Citigroup (C) is one of the world’s largest banks; its weak compliance and risk-management culture led to a disastrous experience in the 2009 global financial crisis, which required an enormous government bailout, recalls Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.
Citigroup reported encouraging second-quarter results. Revenues rose 11% and were about 7% above the consensus estimate. Earnings of $2.30/share fell 19% and were about 39% above the consensus estimate. The company maintained its full-year revenue and expense guidance. Overall, a good report, particularly compared to the dour investor sentiment.
Revenues were boosted by 33% growth in Trade & Treasury Solutions, a crown jewel of the bank which represents 15% of total revenues. Fixed income trading revenues (about 20% of total revenues) jumped 31% as the bank took advantage of investor uncertainty over the direction of inflation and interest rates.
Credit card revenues rose 10% due to higher interest rates on higher balances. As expected, investment banking revenues fell sharply (-46%) as deal volumes shrank.
Total loans fell 2% from a year ago while deposits rose 1%. Citi’s loan/deposit ratio, a simple metric that evaluates the bank’s capacity to make loans, is at about 50%, suggesting that the bank could readily fund faster loan growth. The net interest margin expanded to 2.24%, indicating a wider level of profits on its lending compared to the 1.97% margin a year ago.
Credit quality remains sturdy as credit losses fell 36% from a year ago. The bank’s CET1 capital level rose to 11.9% from 11.8% a year ago despite sizeable dividends and share repurchases. This capital is supported by loan loss reserves that are a generous 2.4% of funded loans.
Citigroup investors enjoy a 4.0% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program once it reaches its new target capital ratio and if a slowing/stalling economy doesn’t meaningfully increase its credit costs.
Citi shares trade at 64% of tangible book value. This immense discount, which assumes a dim future for Citi, appears to be misplaced. We rate the stock a buy; the shares have about 66% upside to our $85 price target.
