Commercial bank stocks such a Citigroup (C) did not fare as well as investors expected in 2022, particularly amid a period of rising interest rates. Banks often benefit from increasing interest rates which increases the net interest margins and their overall profits.
However, that was not the case for Citigroup, which suffered a near 30% decline in its stock during 2022, underperforming its bank peers. Citigroup has been pressured by several factors in 2022. Aside from fears of a global recession, the bank was seemingly punished for its fundamentals, including suspending its shares buyback program due to an increase of 1.5% in its capital requirements. But is now a good time to bet on an outperformance?
We will find out when the bank reports first quarter fiscal 2023 earnings results before the opening bell Friday. The stock is up modestly in 2023, rising 1.4%, but still trailing the 7% rise in the S&P 500 index. As with the rest of the sector, the fallout from the failure of Silicon Valley Bank has pressured Citigroup stock, which has fallen 12% over the past month, while the S&P 500 has risen 1.4%. But the bank has a sound strategy to outperform over the next 12 to 18 months. This includes the divestment of its global consumer bank and accelerate investment in wealth management.
Citigroup management also plans to increase the bank's investment in its Services division comprising Trade and Transaction Services and Security Service. Heading into the first quarter, investors will be looking for progress in these key areas. Meanwhile, with the stock trading at roughly 70% of its tangible book value, while paying dividend yield of 4.46%, Citigroup is a solid bargain in 2023, especially with a potential for the bank to resume its share buyback program.
For the three months that ended March, analysts expect the New York-based bank to earn $1.70 per share on revenue of $19.19 billion. This compares to the year-ago quarter when earnings were $2.02 per share on revenue of $19.19 billion. For the full year, ending in December, earnings are projected to be $5.79 per share, down from $7 per share a year ago, while full-year revenue of $77.81 billion would rise 3.3% year over year.
While concerns remain about global growth, which could impact Citigroup given the bank’s global reach, the management has reduced the bank's high-risk and illiquid assets. The bank has been working to strategically shift its business and exiting consumer banking operations in certain regions. 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 not only revived revenue and the bank’s return on equity, but they have also simplified the business model. This was evidenced with a solid top and bottom-line beat in the fourth quarter when the bank posted better-than expected revenue of $18.1 billion, which beat Wall Street consensus estimates by $3.35 million. “With their revenues up 32%, Services delivered another excellent quarter, and we have gained significant share in both Treasury and Trade Solutions and Securities Services," said CEO Jane Fraser
However, it wasn’t all good news. The Q4 adjusted EPS of $1.16 narrowly missed the mark by 4 cents due to a 2% sequential rise in Q4 operating expenses to $13.0 billion. Operating expenses also rose 3% in the Q2 sequentially, suggesting this is an area the bank needs to get under control. That said, with the stock trading some 20% below its 12-month target of $57, Citigroup remains a stock to own in 2023, combined with an attractive dividend yield of 4.46%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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