Last week, the Federal Reserve hiked a benchmark interest rate by half a percentage point to bring down the worst inflation the U.S. has seen in 40 years. Notably, the Consumer Price Index (CPI) continues to beat historical highs, standing at 8.54% in March 2022 in the U.S. In addition, Jerome Powell, Federal Reserve Chief, said that the Fed would continue to increase the benchmark rate by 25 basis points even if inflation starts decreasing.
However, not all industries suffer from a high-interest rate environment. For instance, the financial industry experiences a profit margin expansion as rates climb due to higher interest income.
Citigroup Inc. is a diversified financial services holding company that offers multiple financial products and services for consumers, institutional investors, corporations, and governments worldwide. JPM operates as a financial service company worldwide through its key four segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management.
Year-To-Date (YTD), shares of Citigroup are down 14.5%, and JPM stock has dropped 22% over the same period.
On May 4th, Citigroup announced that it had launched SEPA Instant Payments in Europe, further expanding its global Instant Payments offering. Now, the clients can pay and receive instant payments from 36 SEPA countries. Citi believes that SEPA Instant Payments will be on-demand across e-commerce businesses and companies with direct-to-consumer business models. In addition, City has recently raised its based lending rate from 3.5% to 4.00%.
Financial Overview & Analysts’ Estimates
On April 14th, Citigroup posted an earnings report for the first quarter of 2022. Although Citigroup’s adjusted revenue decreased 1.9% year-over-year to $19.2 billion, the bank’s top line came above Wall Street revenue estimates by $1.18 billion. Besides, Citigroup’s first-quarter net income decreased 46% year-over-year to $4.3 billion amid higher cost of credit, higher expenses, and lower revenues. Notably, Citi’s cost of credit stood at $755 million in Q1 compared to ($2.1 billion) in the year-ago period. As a result, the bank’s GAAP EPS decreased 44% YoY to $2.02, however, beating analysts’ consensus by $0.56.
Besides, Citigroup is estimated to pay its shareholders an annual dividend of $2.04, leading to a forward yield of 3.95%. It is also important to note that the company’s dividend yield exceeds the industry’s median threshold of 2.84% by 39.02%.
Currently, Wall Street expects C’s earnings to fall about 43% in the second quarter of 2022 to $1.63 per share. On the other hand, analysts forecast that its 2Q2022 revenue should rise 4.37% year-over-year to $18.24 billion.
In the first quarter of 2022, JPMorgan’s total revenue deteriorated 5.0% year-over-year to $30.72 billion, caused by a 13% drop in noninterest revenue to $16.8 billion, partially offset by an 8% YoY increase in net interest income to $13.9 billion. However, the bank was able to beat analysts’ consensus by $170 million. Its Non-GAAP EPS came in at $2.63, missing analysts’ estimates by $0.07.
The bank’s first-quarter net income was down 42% year-over-year to $8.3 billion, primarily due to a net credit reserve build of $902 million versus a net credit reserve release of $5.2 billion in the prior-year period. It is also important to note that JPMorgan schedules to reward its shareholders with a forward annual payout of $4.00, which translates to a dividend yield of 3.23%.
For the current quarter, analysts expect JPM’s EPS to stand at $2.80, down 25.95% year-over-year. However, an $30.91 billion consensus revenue estimate for FQ2 indicates a modest 1.40% YoY improvement.
When it comes to Forward Non-GAAP P/E, JPMorgan is currently trading at 11.07x, which is higher than Citigroup, whose multiple is presently equal to 7.63x. In addition, Citi’s P/E multiple looks undervalued compared to the sector’s median level of 10.27x.
When it comes to the Forward Price/Book multiple, JPM’s P/B multiple of 1.36x is about 151.85% higher than Citi’s 0.54x. Also, Citigroup’s multiple looks discounted compared to the sector median of 1.11x.
Bearish Options Bets Placed On JPM
The open interest levels for January 19th, 2024, $110.00 puts increased on Friday. According to barchart.com, the open contracts rose by 6,100 contracts to about 6,158. It’s a large, bearish bet as the open interest represents a total dollar value of about $7,655,500. For the buyer of those puts to earn a profit, JPM stock would need to drop to around $97.45, implying approximately a 21% downside from JPMorgan’s current price.
While both Citibank and JPMorgan Chase are expected to take advantage of a rising interest rate environment, I believe Citibank is a better investment at current levels amid its superior financials, discounted valuation, higher dividend yield, and better forward growth rates.
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C shares were trading at $50.18 per share on Monday morning, down $1.44 (-2.79%). Year-to-date, C has declined -15.39%, versus a -14.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...
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