Citigroup Inc.'s C stock dropped 5.9% in the past month compared with a 1.8% decline in the industry and against a rise of 0.5% in the S&P 500 index, leaving investors wondering whether to take the benefit of the price decline or to wait for a better entry point.
When compared with its competitors in the banking space, C's performance is weaker. Wells Fargo & Company WFC shares have declined 4.7%, while Bank of America BAC stock fell 0.8% over the same period.
1-Month Price Performance
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Citigroup has been facing heightened regulatory scrutiny lately. Last month, it made the headlines for breaching the Federal Reserve’s Regulation W, which limits intercompany transactions. Those breaches led to discrepancies in its internal liquidity reporting. This was reported by Reuters, citing an internal company document.
This violation is not a single incident that reflects systemic inadequacies in Citigroup's regulatory compliance practices. In July, the U.S. bank regulators penalized the company with a $136-million fine for failing to make adequate progress in fixing data management issues.
Moreover, the company is witnessing a rise in credit losses. At a recently-concluded Barclays conference, Citigroup’s CFO, Mark Mason, stated that Citigroup’s Credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that aren’t vital. The company is witnessing a pickup in revolving credit while payment rates have started to come down a bit.
For 2024, net credit losses are anticipated in the band of 3.5-4% in the company’s branded cards business and 5.75-6.25% in retail services. The cost of credit is expected to be $2.7 billion.
These ongoing challenges are significant obstacles for the bank in the near term.
Nonetheless, Citigroup's long-term prospects look encouraging as it attempts to transform and streamline its operations to boost its stock price.
Citigroup's Long-Term Prospects Remain Bright
Organizational Overhaul to Reduce Costs: The company is carrying out a comprehensive overhaul to improve its performance, cut costs and simplify businesses.
The company completed its organizational simplification in first-quarter 2024, resulting in a simpler management structure and improved accountability. The new operating model consists of five reportable segments and a new financial reporting structure.
The reorganization trimmed management layers and now operates under eight layers rather than 13. As part of the turnaround, Citigroup aims to shrink its workforce by 20,000 over the next two years. With fewer layers, increased spans of control and significantly reduced bureaucracy and unnecessary complexity, the company will be able to operate more efficiently.
Focus on Core Operation: The company has been pursuing growth in core businesses by streamlining international operations. This June, it sold its China-based onshore consumer wealth portfolio to HSBC China. The bank winded down its U.K. retail banking business and plans to expand personal banking and wealth management businesses in the region.
The previously announced wind-down of the company’s consumer banking businesses in Korea and overall presence in Russia are in progress. C is preparing for a planned IPO of its consumer, small business and middle-market banking operations in Mexico. It restarted the sales process for the consumer banking business in Poland. In July, the company announced its plan to discontinue operations in Haiti.
Since announcing its intention to exit consumer banking businesses across 14 markets in Asia, Europe, the Middle East and Mexico as part of its strategic refresh, the company exited from Australia, Bahrain, India, Indonesia, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. Such exits will free up capital and help it pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke fee income growth.
With these initiatives, the company projects revenues to register a compounded annual growth rate (CAGR) of 4-5% by 2026-end.
Scaled-Back Capital Requirements Plan: The Federal Reserve Board’s vice-chair of supervision, Michael Barr, on Sep. 10, outlined proposed Basel regulations. If approved, it would roughly halve the additional capital that big banks would need to maintain to safeguard them in the event of financial crisis. The new plan requires banks to hold 9% of additional capital instead of the 19% proposed in the initial plan.
The modifications above are a part of the global regulatory framework known as the Basel III endgame, which aims to prevent a recurrence of the 2008 financial crisis. The changes relate to the capital surcharge for global systemically important banks (G-SIBs), including C, WFC and BAC.
The toned-down capital requirements, if approved, will be beneficial for Citigroup as the company can allocate the remaining amount to other initiatives or to increase lending activities. This will lead to increased profitability.
Fed Rate Cut Decision: The Federal Reserve is set to start cutting interest rates this week for the first time since March 2020. The rate cut signal is a positive development for banks, including Citigroup, which has been reeling under increasing funding cost pressure. While higher rates have led to a significant jump in banks’ net interest income (NII), the same increased funding costs, which dented margins.
Citigroup's NII and net interest margin (NIM) have been subdued by the increased funding costs as the high-interest rate environment puts pressure on it. In the first half of 2024, C’s NII dropped by 1%. For 2024, management projects NII (excluding Markets) to be modestly down compared with 2023 levels.
NIM declined to 2.41% in the second quarter compared to 2.48% in the year-ago quarter. As interest rates come down, it will be a boon and support NIM expansion.
Hence, the rate cut is expected to benefit the company’s financials in the upcoming period.
Sales Estimates
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EPS Estimates
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As the company is expected to witness an increase in credit losses in the near term, its earnings will be under pressure. Hence, analysts moved their earnings estimates lower over the past month for 2024. Nonetheless, considering its bright long-term prospects, analysts have kept 2025 estimates unchanged.
Estimate Revision Trend
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What Should Investors Do Now – Buy C Stock or Wait?
Citigroup stock appears inexpensive relative to the industry. The company is currently trading at the 12-month trailing price-to-earnings (P/E) F12M ratio of 8.65, below the industry’s 11.08.
P/E F12M
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Technical indicators are not supportive of Citigroup. The stock currently trades below its 50-day moving average. This underperformance could indicate a lack of strong momentum in the near term, suggesting a cautious outlook.
50-Day Moving Average
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In spite of the solid growth potential that Citigroup offers over the long run and its favorable valuation, it is not advisable to add this stock to one’s portfolio right now. Prospective investors should keep an eye on the central bank’s future course of action and rising credit losses, and analyze the impact of these on the company’s financials before making any investment decision. Those who already own the C stock in their portfolio can retain it because it is less likely to disappoint over the long term, given strong fundamentals.
Currently, Citigroup carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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