Citigroup (
C
) may have struck the wrong chord when it announced worse than
expected results late last week. The bank took a $1.3 billion
charge for the quarter, well above the $305 million charge
investors anticipated following Citi's statement some days ago. The
additional $1 billion charge comes from an increase in legal
reserves as the bank is under review by the Consumer Financial
Protection Bureau. Citigroup's CFO also warned of elevated legal
expenses in the near future. But the above does not take away from
the strength of the banking group's globally diversified business
model.
Looking at the bigger picture, Citigroup has a lot more to offer
to its investors as it continues to work its way through some
problems areas, most of which are housed under Citi Holdings, to
separate them from the core Citicorp operations. Below, we
highlight the main factors behind our sanguine outlook and raised
price estimate for Citigroup's stock from $37 to $46
.
See our full analysis of Citigroup here
Global Banking Business Can Benefit Even Under Low
Interest Environments
Citigroup's biggest strength is undoubtedly its extensive global
presence. The bank boasts of operations in 160 countries and
jurisdictions across the globe. This diversification gives the
banking group a big advantage over its competitors as its interest
income does not remain dependent on the interest rate environment
prevalent in a single country - specifically the U.S. The bank also
has access to funds in the form of low interest rate deposits from
all the regions in which it operates.
As a result, the bank can achieve considerable higher net
interest margins, compared to competitors like
Wells Fargo
(
WFC
) and U.S. Bancorp (
USB
), which predominantly operate in the U.S. Citigroup already
demonstrated this for 2012, as the bank consistently reported
higher net interest margins each quarter last year, even as other
banks struggled to maintain margin levels. This fact is indicated
in our updated net interest margin for Citigroup's consumer banking
business shown below.
Improving Credit Quality For Cards Division Presents
Significant Upside
Citigroup has also seen a significant improvement in its credit
card portfolio over recent quarters, with charge-offs and credit
losses consistently declining each quarter. Credit losses on card
loans fell from $2.1 billion in Q4 2011 to $1.6 billion in Q4 2012,
with non-performing loans (loans for which there have been no
payment for more than 30 days) also falling over the period. And
this improvement came even as the bank gradually increased the size
of outstanding loans, as well as the interest income over the last
three quarters.
The improving credit quality will also lead to a lower need for
provisions something we capture in the chart below.
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