Commercial bank stocks such a Citigroup (C) did not fare as well as investors expected in 2023, particularly amid a period of rising interest rates. Banks often benefit from increasing interest rates which increases not only their net interest margins but also their overall profits.
While that was, in come cases, true for Citigroup, the stock still underperformed the broader S&P 500 index over the past year. This is even as the stock outperformed the S&P 500 index in the last six months of the year, rising 16% compared to 5.6% for the S&P 500. But as we head into the bank’s fourth quarter fiscal 2023 earnings results on Friday, there’s still some value to be realized in Citigroup stock.
Last week Wolfe Research Analyst Steven Chubak upgraded the stock to Outperform from Peer Perform, listing the bank among the cyclical names with “idiosyncratic tailwinds.” The analyst noted that, ”Our Top Picks screen best across multiple scenarios in terms of risk-reward, with a combination of asset sensitive “quality” on sale and undervalued cyclical names.” Meanwhile, from a fundamental view, it appears Citigroup shares are severely discounted compared to the underlying value on its balance sheet.
As the stock trades at $54 per share, the bank boasts more than $210 billion in total equity, which equates to book value of more than $90 per share, equating to about a 40% discount to book value. Plus, when factoring the bank’s 3.83% dividend yield, the risk-reward cited above seems even more appealing as we enter the new year. As such, with Citigroup demonstrating a strong loan-to-deposit ratio, expecting a strong stock performance in 2024 is possible, especially with the Fed navigating a soft-landing.
For the three months that ended December, analysts expect the New York-based bank to earn 97 cents per share on revenue of $18.88 billion. This compares to the year-ago quarter when earning were $1.16 per share on revenue of $18.01 billion. For the full year, earnings are projected to be $6.13 per share, down from $7 per share a year ago, while full-year revenue of $79.63 billion would rise 5.7% year over year.
Assuming quarterly earnings does come at 97 cents per share, this would mark a year-over-year decline of more than 16%. However, Q4 revenue is expected to rise some 5% year over year. While that would be a modest increase, it would have reversed the declines the bank has suffered over the previous quarters. This suggests Citigroup is heading the right direction, and the management’s efforts to right-size the business have begun to bear fruit.
Some of the the management’s recent moves includes accelerating investment in both Citigroup’s wealth management business and Services division. 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, making the Citigroup’s operations more efficient and easier to execute.
This was evidenced with a solid top line beat in the third quarter when the bank posted better-than expected revenue of $20.14 billion, which rose about 9% year over year, 3% sequently and beat Wall Street Q3 consensus estimates by $160 million. The revenue beat was driven by a 12% year-over-year rise in Institutional Client Group revenue of $10.6 billion and 10% jump in Personal Banking and Wealth Management revenue of $6.78 billion. These gains offset a 13% drop in Legacy Franchises revenue of $2.21 billion.
It wasn’t a great quarter by any stretch. But if Citigroup’s Q4 results can show continuous improvement, and revive confidence in the bank’s operations, the stock can do very well at this level, especially when combined with its 3.83% dividend yield.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.