Citigroup: Going Cheap

by The Compound Investor

Citigroup (C) released financial results last week. The banking giant last featured on the site back in January, but that pre-COVID article feels totally redundant now. At the time, annual profit generation looked to be somewhere in the region of $17.5B, or $8.50 in per-share terms. We can essentially cut those figures in half thanks to the pandemic. Citi’s stock price has obviously followed suit: the shares currently change hands for around $44.10 apiece, down around 45% year-to-date.

Let’s start with financial results. The bank’s provision for credit losses came in at circa $2.2B in 3Q20; that was down from around $7.9B in 2Q20. Citi has now set aside a total of $17.2B for bad debt so far this year; the comparable figure last year was $6.2B. You can see the COVID economic impact right there. Although it may not look it, this is actually pretty good: most of that $17.2B came in the first half of the year, while credit loss provision last quarter was only 8% higher than in the equivalent period last year. Granted, we can thank the fiscal and monetary responses from higher powers for that, but the point stands nonetheless.

Aside from potential economic implosion, lower interest rates represent the other concern for banks right now. Net interest income came in at $10.5B in the quarter, down from $11.6B in the year-ago period. That helped push overall revenue down to $17.3B, around 7% lower than in 3Q19. Despite all of this, the bank still posted an overall net profit of $3.2B last quarter (circa $1.40 per share). That brought total net profit generated this year to just over $7B (circa $2.96 per share). The worst economy in possibly forever, yet it still makes billions of dollars in net profit.

Going Cheap

Analysts have net income pencilled in at around $4.10 per share this year, enough to put the stock at 10x earnings. Given how depressed those earnings are, it appears that Citi shares are going cheap right now. Indeed, net income is seen rising to over $5.80 per share next year, and to around $8.00 per share over FY22. A mid-single-digit forward earnings multiple looks like one heck of a bargain, even if it is a couple of years out.

(Source: Citigroup 3Q20 Results Presentation)

Some other things to consider. Firstly, Citi remains well capitalized: the bank sported a CET1 ratio of 11.8% at the end of 3Q20, up around 20 basis points quarter-on-quarter on the back of retained profit generation. Secondly, the dividends keep on flowing here: Citi’s current payout works out to $2.04 per share on an annualized basis, equal to a 4.6% yield as things currently stand. More importantly, that dividend remains covered by current profit generation. Finally, the potential for a resumption of share repurchases down the line. At the bank’s current market value, even a few billion dollars spent on buybacks would represent something pretty significant.

When you digest all of the above, it is not hard to spot a potentially compelling medium-term investment case. Buybacks alone could power mid-single-digit dividend growth next year if the company returned all of its estimated retained profit that way. And when that dividend yield is already approaching mid-single digits to start with, well, then you have a recipe for significant share price appreciation. Citigroup shares changed hands for over $70 per share at this point last year. It would not surprise me to see the stock back there within the next eighteen months.

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