Summary: 

• Citigroup has experienced a significant improvement of profitability
• The bank has attractive valuation comparing to its Wall Street’s peers
• Price of stock moves within a strong uptrend, in case of a re-retest of a last resistance, there would be an interesting buying opportunity 

A banking sector has been one the best performing following the victory of Donald Trump in the US presidential elections last year. The sector has benefited from planned fiscal reforms as well as hopes for a quicker normalization of monetary policy in the US economy. Although, these hopes have partly evaporated Citigroup looks still relatively undervalued compared to peers.

Significant earnings improvement

After the financial crisis which took place a few years ago, the American banks were afflicted by more restrictive regulations as well as overhauls. Both factors impacted substantially their profitability. What’s more even low interest rate environment did not prove to be conducive for them. However, expectations of a normalization of the US monetary policy along with the Trump’s attitude with regard to business have strengthened the banking sector. Citigroup’s Q1 earnings turned out better than expected. Net income amounted to $4.1bn (+17% yoy), EPS (stripping out one-off events) was at $1.35, a result above markets’ estimation and the previous year value. What’s equally important, there was a rebound in revenues which rose from $17.555bn to $18.12bn. It stemmed mainly from the fact that noticeable improvements were seen in trading (revenues from bonds and stocks trading picked up 19% and 10% yoy respectively). There was a significant upturn (a double digit growth of revenues) in case of bank’s institutional customers all but across the globe except for Asia. Moreover, the retail banking registered an increase in loans activity (+2% yoy) and a growth in deposit holdings (+2 yoy as well). 

Since the beginning of the year Citigroup has shown a meaningful earnings improvement. Source: Bloomberg

Where can investors look for an upside?

The last global financial crisis brought a bankruptcy of the Lehman Brothers while many other institutions were rescued by various form of external aid. There were new regulatory changes both in Europe and America in order to reduce a systemic risk. Higher capital adequacy ratios were among them. The CET1 for Citigroup was 12.8% at the end of Q1, above firm’s main competitors. The higher ratio, the less money which can be used to business activity. On that account, the bank’s ROE amounted to just 7.4%, it’s a bit higher one comparing to the same period last year though (6.4%). However, quite restrictive capital adequacy ratio could improve banks’ positions which are vetted by the Federal Reserve via stress tests once a year. It cannot be forgotten, the bank still remains in an overhaul mode. All in all, the termination of the overhaul along with softening of regulations for the banking sector by the White house should act in favor of banks’ profitability, and thereby strengthen their market capitalization.

Citigroup offers attractive valuation

A relative valuation of Citigroup looks pretty attractive when we compare the company to other banks listed on Wall Street. The P/E ratio for the ongoing year is at 11.9, while the forward P/E for the next year is at 9.6. Both values are lower than in case of other banks. Having assumed a lowering of the effective tax rate, the whole industry could take advantage of it.

A relative valuation of Citigroup looks pretty attractive when we compare the company to other banks listed on Wall Street. Source: FIG Ideas estimates

Recommendations

Brokerage houses share mostly a common and positive view with regard to the outlook for Citigroup. There are 20 out of 31 calls which maintain ’buy’ and 9 ’holds’. Just two institutions recommend selling the stock. The average price target is at $65.62 what implies a 2% increase in comparison to the current market capitalization. However, there has been just 1% of shares used to short selling suggesting that market participants are not convinced as to the further uptrend.

There are 20 out of 31 calls which maintain ’buy’ and 9 ’holds’. Just two institutions recommend selling the stock. The average price target is at $65.62 what implies a 2% increase. Source: Bloomberg

Technical analysis

The stock has almost doubled its value since the lows from the last year. Prices have broken through the local highs in the vicinity of $65.53 recently and one could expect some corrective moves to occur. Therefore, if there is a re-test of the (recently) broken resistance, it could be an interesting buying opportunity. At the end of the day, as long as bulls manage to maintain within an upward channel, this positive should prevail. 

After the breakout of the recent highs some corrective moves towards $62.5 could be anticipated. Source: xStation5

To sum up, a relative valuation of Citigroup looks pretty attractive when we compare the company to other banks listed on Wall Street. At the same time, it has promising prospects of further development when the overhaul is completely accomplished and Trump’s administration decides to soften regulations for the banking sector. Besides, the stock remains in a strong uptrend and that could encourage buyers.