Commercial bank stocks such a Citigroup (C) did not fare as well as investors expected in the first half of the year, particularly amid a period of rising interest rates. Banks often benefit from increasing interest rates which increases the net interest margins and their overall profits; however, that was not the case for Citigroup.
But is now a good time to bet on an outperformance in the back half of the year? Relative to its megabank pears, Citigroup stock appears to be cheap and offer compelling value. But we will find whether there’s value to be realized when the bank reports second quarter fiscal 2023 earnings results before the opening bell Friday. Citigroup has seen its stock fall more than 4% over the past six months, while the S&P 500 index has risen more than 13%.
As with the rest of the sector, the fallout from the failure of Silicon Valley Bank has pressured Citigroup stock amid fears of liquidity pressures, but Citigroup has a sound strategy to outperform over the next 12 to 18 months. Over the past few quarters, the bank’s net interest margin has increased modestly. What’s more, given the current interest rate environment, the bank appears well-positioned to execute its growth strategy, which includes the divestment of its global consumer bank.
What’s more, Citigroup has accelerated investment in its wealth management business, while also upping its investment in its Services division comprising Trade and Transaction Services and Security Service. Heading into the second quarter, investors will be looking for progress in these key areas. Meanwhile, with the stock trading some roughly 26% below its 12-month price target of $57, while paying dividend yield of 4.41%, Citigroup looks like a solid bargain for the second half of 2023, especially with a potential for the bank to resume its share buyback program.
For the three months that ended June, analysts expect the New York-based bank to earn $1.40 per share on revenue of $19.68 billion. This compares to the year-ago quarter when earnings were $2.19 per share on revenue of $19.64 billion. For the full year, ending in December, earnings are projected to be $6.07 per share, down from $7 per share a year ago, while full-year revenue of $79.17 billion would rise 5.1% year over year.
Assuming the bank reports earnings of $1.40 per share, this would mark a year-over-year decline of 42%. Meanwhile, consensus revenue estimate of $19.67 billion would mark an increase of just 0.16% from the year-ago period. In essence, the financial metrics still suggest the bank is struggling. Conversely, the management has reduced the bank's high-risk and illiquid assets which reduces concerns if global growth declines.
As noted, its management has been working to strategically shift the bank's business and exiting consumer banking operations in certain regions. The goal is to realign Citi’s structure to focus on areas such as Personal Banking, Wealth Management, and Legacy Franchises segments. These moves have have simplified the business model. This was evidenced with a solid top and bottom line beat in the first quarter when the bank posted better-than expected revenue of $21.45 billion, which beat Wall Street consensus estimates by $1.43 million.
Q1 revenue beat estimates even as the bank realized $1.02 billion worth of divestitures. Meanwhile, Q1 adjusted EPS of $2.19 easily beat estimates by 51 cents. The beat came even though the Q1 operating expenses were $13.3 billion, rising slightly from $13.2 billion in Q1 2022. This suggests this remains an area the bank needs to get under control. That said, with the stock trading some 21% below its 12-month target of $57, Citigroup is attractive, especially when combined with a dividend yield of 4.41%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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