Personal Finance

3 Reasons Shares of Citigroup Are Down in 2016

C Chart
C Chart

C data by YCharts .

1. Interest rates

In the first case, all banks are operating in an unusually inhospitable environment right now. Higher regulatory and compliance costs related to the 2010 Dodd-Frank Act play an obvious role in that. But the biggest culprit are ultralow interest rates.

Ever since the financial crisis eight years ago, the Federal Reserve has kept the benchmark Fed Funds rate hovering near 0%. Because all other interest rates take a cue from this, it has driven down the yield on bank loan portfolios.

Effective Federal Funds Rate data by YCharts .

In Citigroup's case, it estimates that an increase of only 100 basis points, or 1 percentage point, in short- and long-term rates would boost its net interest revenue by $2 billion. That would make a meaningful difference for a bank that earns less than $4 billion a quarter. Split among four quarters, it would increase Citigroup's net income by around 13%.

2. Geopolitical uncertainty

The second thing that's weighed on Citigroup's shares this year has been geopolitical uncertainty, and specifically tied to the United Kingdom's pending exit from the European Union. When it became clear early in the first quarter that the U.K. would hold a referendum over whether to remain in the union, the increase in uncertainty caused institutional investors to back away from the financial markets.

This may not seem like a bad thing for a bank, but the largest lenders, Citigroup among them, also derive a significant amount of revenue from market making -- that is, helping their clients buy and sell financial assets. By staying on the sidelines, then, these clients triggered a 15% drop in Citigroup's trading revenue.

As Citigroup CEO Michael Corbat readily acknowledged on the first-quarter conference call: "These results reflect a difficult macro environment which was more challenging than we anticipated when we entered the year."

The issue compounded in June when the referendum took place and passed, meaning that the U.K. would in fact exit the EU. This sent shares of bank stocks, many of which had made up lost ground since February, down once again.

3. Low energy prices

A sharp decline in oil and natural gas prices also weighed heavily on Citigroup's shares this year, particularly in the first quarter. Energy prices reached their low point in February, with oil dropping below $30 a barrel for the first time in over a decade.

Brent Crude Oil Spot Price data by YCharts .

This impacts banks like Citigroup that loan money to energy companies, which were buckling under the weight of low prices. To this end, while the New York-based bank was able to release loan loss reserves in the first quarter of 2015, it had to build reserves in the first quarter of this year, amounting to a $364 million swing.

In sum, due to a combination of these three factors, bank stocks across the board have struggled to get into positive territory this year. And Citigroup has obviously not been an exception to that.

A secret billion-dollar stock opportunity

The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More