Citigroup, Inc. (C) is one of the largest U.S.-based global banks, with a presence in nearly 160 countries. It has more than 200 million customers worldwide and has been recognized by Euromoney as the Best Bank for Corporate Responsibility in Asia. Also, C won the Celent’s Model Bank 2021 Award for Commercial Payments, on the strength of  its recently launched payments solutions—Citi Global Collect and Citi Global Instant Payments.

However, C’s financials have been affected significantly by the continuing low-interest environment, reducing its profit margins substantially.

As a result, despite being a renowned bank with a market capitalization of more than $147 billion, C’s 11.37% trailing-12-month ROE is 9.1% lower than the 12.51% industry average.

Here’s what could shape C’s performance in the near term:

Divestiture

On August 9, C announced its plans to sell its Australian local consumer unit to National Australia Bank for $882.24 million. This divestiture comes as C’s old credit card business model continues to be rivaled by the burgeoning buy-now, pay-later business models of competitors and shrinking credit card payments in Australia since last year, which has negatively impacted the U.S. giant’s revenues.

The divestiture agreement is aligned with C’s plan to exit 13 overseas consumer operations and use the capital generated to invest in its strategic priorities.

Dwindling Financials

C’s total revenues came in at $17.47 billion in its fiscal second quarter ended June 30, reflecting a 12% decline year-over-year and 10% decline sequentially. Its revenues from its Institutional Clients Group (ICG) fell 14% year-over-year and 15% sequentially to $10.39 billion due to normalization in fixed income markets. Its revenues from its Global Consumer Banking declined 7% year-over-year and 3% sequentially to $6.82 billion, driven by lower average card loans.

The company’s EBT declined 29% from the prior quarter to $7.35 billion, while its net income plummeted 22% sequentially to $6.19 billion.

However,  C’s GCB retail banking average deposits increased 17% from the prior-year quarter to $353 million. In addition, GCB Investment’s  AUM was  $232 million over this period, up 24% from the same period last year.

Discounted Valuation

In terms of non-GAAP forward P/E, C is currently trading at 7.20x, which is 34.7% lower than the 11.03x industry average . In addition, its 0.26 non-GAAP forward PEG ratio  is 75.1% lower than the 1.03x industry average.

Moreover, the stock’s forward Price/Sales and Price/Book multiples of 2.05 and 0.77, respectively, compare favorably with the 3.28 and 1.17 industry averages.

Mixed Growth Outlook

A $16.94 billion consensus revenue estimate for its fiscal fourth quarter (ending December 2021) indicates a 2.7% rise year-over-year. Moreover, the bank’s revenue is expected to rise 1.7% from the same period last year to $72.02 billion next year. C’s EPS is expected to increase 23.3% in the current quarter (ending September 2021) and 103.4% in the current year.

However, the Street expects the bank’s revenues to decline 1.2% in its  fiscal third quarter (ending September 2021) and 4.7% in fiscal 2021. The consensus EPS estimates indicate a 19.5% year-over-year decline in the next quarter and a 20.2% year-over-year decline in fiscal 2022.

Consensus Rating and Price Target Indicate Potential Upside

All eight Wall Street analysts that rated C have rated it Buy. The 12-month median price target of $90.75 indicates a 26.9% potential upside from yesterday’s closing price of $71.52. The price targets range from a low of $73.00 to a high of $114.00.

POWR Ratings Reflect Neutral Prospects

Citigroup has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Citigroup has a C grade for Sentiment, Stability, and Growth. C’s mixed outlook and a relatively high 1.91 beta  justify the Sentiment and Stability grades, respectively. In addition, while the bank’s normalized net income has risen at a 4.8% CAGR over  the past three years, its EBITDA has declined at a 6.6% rate  over this period. This mixed growth story is in sync with the Growth grade.

Of the 12 stocks in the C-rated Money Center Banks industry, Citigroup is ranked #3.

In addition to the grades we’ve highlighted, we have also rated C for Value, Quality, and Momentum. Get all C ratings here.

Click here to view the top-rated stocks in the Money Center Banks industry.

Bottom Line

C has been taking active steps to boost its profit margins and restructure its business in the face of  macroeconomic headwinds. In April, CEO Jane Fraser announced her plans to exit 13 overseas locations to boost the company’s profitability. Thus, we think investors should wait for the divestitures to deliver expected results and C’s growth outlook to improve before investing in the stock.

C shares were trading at $73.23 per share on Tuesday afternoon, up $1.71 (+2.39%). Year-to-date, C has gained 21.51%, versus a 19.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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