Earlier this year, the U.S. banking industry encountered its worst crisis since the global financial crisis in 2008 as three regional banks failed, affecting investors’ and depositors’ confidence in the banking system. The FDIC reported that U.S. banks lost $472 billion in deposits in the first quarter.
In the Federal Reserve’s annual stress test, all 23 U.S. banks weathered a severe recession scenario while lending to consumers and corporations. Despite showing signs of stability, the banking industry, especially big banks like Citigroup Inc. (C), continues to lose deposits as customers shift their deposits to regional banks in search of higher interest rates.
In this piece, I have discussed why waiting for a better entry point in C shares could be wise.
During the second quarter, America’s four largest banks by assets, JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), C, and Wells Fargo & Company (WFC) lost $262 billion in deposits year-over-year. CFRA equity analyst Alexander Yokum said, “The regionals are winning the deposit battle right now because they’re willing to pay the most.”
C missed the consensus EPS estimate for the second quarter by 0.9%. However, it beat the revenue estimates by 0.8%. C’s CEO Jane Fraser said, “Amid a challenging macroeconomic backdrop, we continued to see the benefits of our diversified business model and strong balance sheet.”
“Our Services businesses continued to deliver strong revenues, with Treasury and Trade Solutions and Securities Services both up a healthy 15%. Markets revenues were down from a strong second quarter last year, as clients stood on the sidelines starting in April while the U.S. debt limit played out. In Banking, the long-awaited rebound in Investment Banking has yet to materialize, making for a disappointing quarter,” he added.
However, driven by strong loan growth, personal banking and wealth management revenue increased 6% during the second quarter to $6.4 billion. Fraser also mentioned that C’s card business witnessed double-digit growth due to strong engagement and continued normalization in payment rates.
Although its Wealth revenues were down, the bank continued to attract new clients and is also witnessing growth in segments like Wealth at Work. During the second quarter, C returned $2 billion to shareholders through dividends and share buybacks.
According to C’s regional head of family office advisory business Faye Ong, the Asia family office business expects a 25% increase in clients this year. C forecasted its fiscal 2023 revenue to be between $78 billion and $79 billion. The company raised its outlook for net interest income, excluding markets, from $45 billion to more than $46 billion.
C’s stock has declined 2% in price year-to-date and 16.6% over the past year to close the last trading session at $44.34.
Here’s what could influence C’s performance in the upcoming months:
Mixed Financials
C’s total revenues, net of interest expense for the second quarter ended June 30, 2023, declined 1% year-over-year to $19.44 billion. Its net income fell 35.9% over the prior-year quarter to $2.92 billion. The company’s return on average common equity came in at 5.6%, compared to 9.7% in the prior-year quarter. Its EPS came in at $1.33, representing a decline of 39.3% year-over-year.
On the other hand, its CET1 ratio came in at 13.3%, compared to 11.95% in the year-ago quarter. Its net interest income rose 16% year-over-year to $13.90 billion. Its total assets increased 2% year-over-year to $2.42 trillion. Also, its book value per share came in at $97.87, compared to $92.95 in the prior-year quarter.
Mixed Analyst Estimates
Analysts expect C’s EPS for fiscal 2023 to decline 18.2% year-over-year to $5.82. Its revenue for fiscal 2023 is expected to increase 5% year-over-year to $79.10 billion. Its EPS for fiscal 2024 is expected to increase 7.2% year-over-year to $6.23. On the other hand, its revenue for fiscal 2024 is expected to increase 0.7% year-over-year to $79.66 billion.
Mixed Profitability
In terms of the trailing-12-month net income margin, C’s 19.09% is 25.6% lower than the 25.66% industry average. Likewise, its 6.69% trailing-12-month Return on Common Equity is 40.5% lower than the industry average of 11.25%.
On the other hand, in terms of the trailing-12-month Capex/Sales, C’s 8.89% is 352.8% higher than the industry average of 1.96%.
Discounted Valuation
In terms of forward non-GAAP P/E, C’s 7.62x is 21.8% lower than the 9.75x industry average. Its 1.08x forward Price/Sales is 55.8% lower than the 2.44x industry average. Likewise, its 0.44x forward Price/Book is 58.3% lower than the 1.06x industry average.
POWR Ratings Reflect Uncertainty
C has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. C has a C grade for Quality, consistent with its mixed profitability. It has a B grade for Value, in sync with its discounted valuation.
C is ranked #4 out of 10 stocks in the Money Center Banks industry. Click here to access C’s Growth, Momentum, Stability, and Sentiment ratings.
Bottom Line
With interest rates unlikely to be cut this year, banks might continue to earn more NII. Moreover, C raised its NII guidance for fiscal 2023. It could benefit as the recovery in investment banking revenues is widely expected during the year’s second half. Also, the bank continues to remain well-capitalized, with a CET1 ratio of 13.3%.
However, the risks pertaining to the uncertain macroeconomic environment remain. Given its mixed financials, profitability, and analyst estimates, it could be wise to wait for a better entry point in the stock.
How Does Citigroup Inc. (C) Stack Up Against Its Peers?
C has an overall POWR Rating of C, equating to a Neutral rating. Check out these stocks from the Foreign Banks industry with B (Buy) rating: Banco BBVA Argentina S.A. (BBAR), KB Financial Group Inc. (KB), and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA).
What To Do Next?
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C shares were trading at $44.18 per share on Friday morning, down $0.16 (-0.36%). Year-to-date, C has gained 0.88%, versus a 16.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
