Depending on who you ask, bank stocks are poised to be this year’s top out-performers compared to other sectors. With the Financial Select Sector SPDR ETF (XLF) now up some 13% in six months, while rising 5.4% year to date, besting the S&P 500 index in both spans, it would seem any concern the market has had about the state of the economic recovery has vanished.
Thanks to an accommodative Federal Reserve, 2022 will present multiple tailwinds, including the likelihood of multiple interest rate increases, which should boost bank's net interest margins. Commercial bank stocks, including Citigroup (C), have seen a strong rebound amid the recent rise in U.S. Treasury yields. Currently trading near $66, Citi stock has risen as much as 15% since a December 20 low of around $57. Whether or not this surge continues remains to be seen. The money center bank is set to report fourth quarter fiscal 2021 earnings results before the opening bell Friday.
It's important to note that the recent uptick in yields comes at a time when the market expects the Federal Reserve to raise interest rates on as many as three occasions. Combined with the idea of less accommodative monetary policy and a tightening cycle, bank stocks are poised to outperform the broader market during the first half of the year. In the case of Citigroup, which has been pressured by regulators to resolve issues related to internal controls regarding compliance, data, and risk management, the bank has tons of ground to make up when compared to its peers.
The management has done a decent job navigating the low-rate environment. Over the last four quarters, Citi has surpassed consensus EPS estimates all four times, including a better than 30% beat in Q3. What’s more, the bank currently trades at roughly 80% of its tangible book value. That combined with an attractive dividend yield of 3.1%, along with a potential boost in the share buyback makes Citi a stock to own in 2022.
For the three months that ended December, analysts expect the New York-based bank to earn $1.71 per share on revenue of $16.98 billion. This compares to the year-ago quarter when earning were $2.08 per share on revenue of $16.5 billion. For the full year, earnings are projected to rise 112% year over year to $10.32 per share, while full-year revenue of $71.01 billion would decline 4.4% year over year.
While concerned remain about global growth, which could impact Citigroup given the bank’s global reach, the management has reduced the bank's high-risk and illiquid assets. These moves have revived revenue and the bank’s return on equity. And as the economy starts to fully reopen, Citigroup’s net interest income will trend higher as it benefits from sustained growth in loans and deposits. In the third quarter, Citigroup beat on both the top and bottom lines as the bank’s strong performance in equities markets and investment banking, both rising about 40% year over year, boosted quarterly revenue.
Third quarter EPS of $2.15 beats the consensus estimate of $1.79, rising 31% year over year from EPS of $1.36 in Q3 2020. The bank saw a 4% rise (sequentially and annually) in Institutional Clients Group revenue of $10.8 billion. Just as impressive, Q3 operating expenses of $11.5 billion moderated, while deposits of $1.35 trillion rose sequentially and annually).
These improved metrics, combined with the bank’s efforts to increase operating efficiency via strategic cost reductions, are paying dividends. On Friday the market will want to see whether these trends can continue.
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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