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Citigroup (C) Stock Rallies 27.3% YTD: What's Next for Investors?
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Citigroup, Inc. (C - Free Report) had an impressive run, with the stock rising 27.3% year to date. The rise has outpaced the 23.3% rally registered by the industry and the 15.8% growth of the Zacks S&P 500 composite.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
When compared with its competitors in the banking space, C's performance is notably stronger. Wells Fargo & Company (WFC - Free Report) has surged 22.6%. Over the same period, Bank of America (BAC - Free Report) has appreciated 23.6%.
Technical indicators suggest continued strength for Citigroup. The stock trades above its 50-day moving average, signaling robust upward momentum and price stability. This positive trend can be attributed to the efforts that the company is undertaking to transform business by focusing on core operations.
50-Day Moving Average
Image Source: Zacks Investment Research
Given the continuous strength of C shares, many investors may be tempted to buy the stock. However, the pertinent question remains: Is now the right time to invest? To answer this, it’s important to delve into the details and analyze various factors at play.
What Lies Behind this Upsurge
Citigroup is riding on a strong rebound in the investment banking (IB) business. In the first half of 2024, the metric shone the brightest, with a 45% surge from first-half 2023 levels. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
The company’s improvement in fee-based income is also contributing to its growth. In the first half of 2024, fee revenues saw an uptick of 9%, driven by strength across underlying fee-based business. On the other hand, C’s net interest income declined marginally in the first half of 2024 due to high funding costs.
What’s More for the Stock in the Long Run?
Focus on Core Operation: Citigroup has been pushing for growth in core businesses by streamlining international operations. This June, the company sold its China-based onshore consumer wealth portfolio to HSBC China — a wholly-owned subsidiary of HSBC Holdings plc. The bank winded down its UK 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. Citigroup 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.
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 the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE, and London to stoke fee income growth.
Fed’s Stress Test Result Favorable: Per the 2024 Federal Reserve stress test, under the severely adverse scenario, Citigroup’s capital ratio would fall to 9.7%, marginally above BAC’s at 9.1% and well above WFC’s at 8.1%. As a result, in a potential downturn like the one envisioned in the stress test scenario, Citigroup’s shares may outperform some of its biggest peers.
This also led the company to announce enhanced capital distributions. In July 2024, the company hiked its quarterly dividend by 6% to 56 cents per share. It also plans to repurchase $1-billion shares in third-quarter 2024.
The company increased its dividend thrice in the past five years. C's payout ratio currently sits at 39% of earnings.
Rate Cut Signal: The Fed chairman, Jerome Powell, signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Citigroup's NII and net interest margin (NIM) have been subdued by the increased funding costs as the high interest rate environment weighed on it. For 2024, management projects NII (excluding Markets) to be modestly down compared to 2023. As interest rates come down, it will be a boon and support NIM expansion.
Rising Expenses and Regulatory Hurdles
The continued investment in the transformation of underlying technology and business-led investments have resulted in the flaring up of operating expenses for Citigroup. Even though the company has been cutting costs by reducing its workforce for the past several quarters, the same will take some time to reflect in its financials.
Citigroup has been facing heightened regulatory scrutiny lately. This June, regulators identified deficiencies in “living wills” submitted by the company describing how the lenders would wind themselves down amid a catastrophic event. The bank has been asked to report to regulators its plans to correct the inadequacies by September. These plans must also address the shortcomings in the banks' next resolution plans, due on Jul 1, 2025.
Analyst Sentiments Down
Over the past month, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved downward, reflecting analyst bearish sentiments.
Estimate Revision Trend
Image Source: Zacks Investment Research
Trading at a Discount
From a valuation standpoint, Citigroup appears inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 9.80X, below the industry average of 11.77X. The stock is also significantly cheaper than its peer BAC and WFC’s current forward 12-month P/E of 11.85X and 11.20X, respectively.
Price-to-Earnings (Forward 12 Months)
Image Source: Zacks Investment Research
What Should Investors Do?
To summarize, despite the solid growth potential Citigroup offers over the long run and its favorable valuation, it is not advisable to add this stock to one’s portfolio right now, considering its increased expenses and current high interest rate environment along with ongoing legal scrutinization.
Although the expected rate cut later this year might offer some support, Citigroup's performance in the future will be greatly influenced by its capacity to control expenses and negotiate the high-interest rate regime. Investors should keep a close eye on these issues before making a well-informed investment decision.
Those who already own the C stock in their portfolio can hold on to it because it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Citigroup (C) Stock Rallies 27.3% YTD: What's Next for Investors?
Citigroup, Inc. (C - Free Report) had an impressive run, with the stock rising 27.3% year to date. The rise has outpaced the 23.3% rally registered by the industry and the 15.8% growth of the Zacks S&P 500 composite.
Year-to-Date Price Performance
When compared with its competitors in the banking space, C's performance is notably stronger. Wells Fargo & Company (WFC - Free Report) has surged 22.6%. Over the same period, Bank of America (BAC - Free Report) has appreciated 23.6%.
Technical indicators suggest continued strength for Citigroup. The stock trades above its 50-day moving average, signaling robust upward momentum and price stability. This positive trend can be attributed to the efforts that the company is undertaking to transform business by focusing on core operations.
50-Day Moving Average
Given the continuous strength of C shares, many investors may be tempted to buy the stock. However, the pertinent question remains: Is now the right time to invest? To answer this, it’s important to delve into the details and analyze various factors at play.
What Lies Behind this Upsurge
Citigroup is riding on a strong rebound in the investment banking (IB) business. In the first half of 2024, the metric shone the brightest, with a 45% surge from first-half 2023 levels. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
The company’s improvement in fee-based income is also contributing to its growth. In the first half of 2024, fee revenues saw an uptick of 9%, driven by strength across underlying fee-based business. On the other hand, C’s net interest income declined marginally in the first half of 2024 due to high funding costs.
What’s More for the Stock in the Long Run?
Focus on Core Operation: Citigroup has been pushing for growth in core businesses by streamlining international operations. This June, the company sold its China-based onshore consumer wealth portfolio to HSBC China — a wholly-owned subsidiary of HSBC Holdings plc. The bank winded down its UK 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. Citigroup 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.
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 the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE, and London to stoke fee income growth.
Fed’s Stress Test Result Favorable: Per the 2024 Federal Reserve stress test, under the severely adverse scenario, Citigroup’s capital ratio would fall to 9.7%, marginally above BAC’s at 9.1% and well above WFC’s at 8.1%. As a result, in a potential downturn like the one envisioned in the stress test scenario, Citigroup’s shares may outperform some of its biggest peers.
This also led the company to announce enhanced capital distributions. In July 2024, the company hiked its quarterly dividend by 6% to 56 cents per share. It also plans to repurchase $1-billion shares in third-quarter 2024.
The company increased its dividend thrice in the past five years. C's payout ratio currently sits at 39% of earnings.
Rate Cut Signal: The Fed chairman, Jerome Powell, signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Citigroup's NII and net interest margin (NIM) have been subdued by the increased funding costs as the high interest rate environment weighed on it. For 2024, management projects NII (excluding Markets) to be modestly down compared to 2023. As interest rates come down, it will be a boon and support NIM expansion.
Rising Expenses and Regulatory Hurdles
The continued investment in the transformation of underlying technology and business-led investments have resulted in the flaring up of operating expenses for Citigroup. Even though the company has been cutting costs by reducing its workforce for the past several quarters, the same will take some time to reflect in its financials.
Citigroup has been facing heightened regulatory scrutiny lately. This June, regulators identified deficiencies in “living wills” submitted by the company describing how the lenders would wind themselves down amid a catastrophic event. The bank has been asked to report to regulators its plans to correct the inadequacies by September. These plans must also address the shortcomings in the banks' next resolution plans, due on Jul 1, 2025.
Analyst Sentiments Down
Over the past month, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved downward, reflecting analyst bearish sentiments.
Estimate Revision Trend
Trading at a Discount
From a valuation standpoint, Citigroup appears inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 9.80X, below the industry average of 11.77X. The stock is also significantly cheaper than its peer BAC and WFC’s current forward 12-month P/E of 11.85X and 11.20X, respectively.
Price-to-Earnings (Forward 12 Months)
What Should Investors Do?
To summarize, despite the solid growth potential Citigroup offers over the long run and its favorable valuation, it is not advisable to add this stock to one’s portfolio right now, considering its increased expenses and current high interest rate environment along with ongoing legal scrutinization.
Although the expected rate cut later this year might offer some support, Citigroup's performance in the future will be greatly influenced by its capacity to control expenses and negotiate the high-interest rate regime. Investors should keep a close eye on these issues before making a well-informed investment decision.
Those who already own the C stock in their portfolio can hold on to it because it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.