The Cat’s Meow: Citigroup Trading at Purr-fect Valuations?

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Four major banks reported earnings last Friday.

Financial pros only cared about one…Citigroup (C).

Search volume for the beleaguered bank doubled the well-loved JP Morgan Chase (JPM) and Bank of America (BAC), despite a worse-than-expected $1.8 billion loss.

However, most of that loss was tied to restructuring charges as management seeks to transform the international finance powerhouse.

After digging into the data, we believe financial pros are on to something.

There might be more value here than meets the eye…

Citigroup’s Business

Of the big Wall Street banks, Citigroup bills itself as a global player, connecting customers around the world.

However, CEO Jane Fraser wants a leaner company focused on its core markets.

To that end, Citigroup:

• Has exited 13 consumer markets across Asia, Europe, and the middle east, including Russia, India, Poland, South Korea, and China, as well as spinning off its Mexican consumer bank through an IPO.
• Plans to cut its workforce by 20,000 jobs or 10% over the next two years
• Grow commercial banking and U.S. personal banking markets.

Source: Citigroup Q4 2023 Earnings Presentation

Citigroup’s current business is divided into:

• Services –  Transaction services, such as cash management, trade finance, securities services, and commercial cards, to institutional clients.
• Markets – Sales and trading services, such as fixed income, equities, commodities, foreign exchange, and prime brokerage, to institutional clients.
• Banking – Corporate and investment banking services, such as capital raising, mergers and acquisitions, advisory, lending, and structured products, to institutional clients.
• Wealth – wealth management services, such as financial planning, investment management, brokerage, trust, and banking, to high-net-worth and ultra-high-net-worth individuals and families, as well as to retail clients. Also includes the Citi Private Bank, Citi Personal Wealth Management, and Citi International Personal Bank businesses.

Source: Citigroup Q4 2023 Earnings Presentation

Financials

Source: Stock Analysis

Citigroup benefited tremendously from higher interest rates, with net interest income (the difference between the rates they pay depositors and the rate they lend) up 4% YoY in Q4 and 13% for all of 2023.

However, non-interest revenue tanked 43% YoY in Q4 and was down 12% in 2023 compared to 2022, about a third related to divestitures.

Excluding one-time items, revenues slipped by 3% while operating income declined by 20% compared to Q4 2022, as corporate lending dropped 26% and lower year-end volatility negatively impacted fixed-income trading.

The good news is roughly $4.7 billion this quarter was tied to one-time items, from restructuring charges to a special FDIC assessment.

And all the restructuring charges are expected to deliver $2.5 billion in annual cost savings by 2025.

Plus, CFO Mark Mason outlined projections for 4%-5% compounded annual growth through 2026.

Valuation

Source: Seeking Alpha

With many changes in the works, it’s not surprising to see Citigroup trade at a discount to its peers.

Interestingly, JP Morgan trades at a lower trailing P/E ratio but a slightly higher forward P/E ratio.

With banks, we also like to look at the price-to-book ratio to see how investors value the loan portfolio.

Here, Citigroup looks dirt cheap. However, the market is likely discounting expectations for Citigroup to achieve its transformation by 2025-2026. 

For comparison, it took Wells Fargo (WFC) nearly five years to complete its turnaround and had a far less complicated business model.

Growth

Source: Seeking Alpha

Unsurprisingly, Citigroup’s revenue growth is negligible. We don’t know yet whether they’ll achieve the 4%-5% average growth in 2024, coupled with more cost savings.

Comparatively, all the other banks have seen net income growth well into the double-digit range, save for US Bancorp (USB).

Profitability

Source: Seeking Alpha

Right now, Citigroup’s profitability falls well short of its peers. Its future relies heavily on its ability to deliver on its planned turnaround.

Our Opinion 9/10

We believe Citigroup’s transformation plans will succeed, though they will likely take longer than is being forecast.

Nonetheless, we don’t believe the 4% dividend is in danger of a cut anytime soon, providing investors with a nice cushion while you wait.

However, be prepared for pullbacks as possible rate cuts would eat into net interest income and overall profitability in the near future.

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