Citi is up 37% year-to-date, more than doubling the returns of the big banking industry. Can this momentum continue?
Q2 earnings season is on its way, and the big banks are kicking off the excitement. Citigroup C, the first of the top-tier banks to report, just released a top and bottom-line beat before the opening bell. Illustrating 7% year-over-year profit increasing and displaying that falling interest rates and market volatility aren’t having as large of an impact as investors expected. The question that now needs to be addressed is whether or not we should consider Citigroup for our current portfolio?
The Federal Reserve is expected to cut interest rates to conclude their 2 day meeting on July 31st. This has depressed EPS estimates for Citi and pushed them into a Zacks Rank #4 (Sell).
Interest rates are driving 64% of income, and over 50% of their revenue is derived from operations abroad. This leaves Citigroup exposed to a substantial amount of international as well as interest rate risk.
Total loan volume has increased but the margins that Citi can attain from interest-driven revenue is shrinking, due to dropping interest rates, close to offsetting each other.
Citigroup announced a $17.1 billion stock buyback program for next year, representing 10% of the total market cap. With the Fed expected to continue lowering interest rates, this is one of the few ways these banks can maintain EPS growth.
Citi is currently boasting a 2.5% dividend yield and this dividend is expected to grow 108% in the next 3 years as restrictions on payouts are reduced. This dividend growth rate far outpaces any competitors.
Return-on-equity (ROE) for Citi has grown to 10.1%, but it is still lagging behind key competitors like JP Morgan JPM who achieves a 14.2% ROE and Bank of America BAC with their 11.8% ROE.
Over the past 5 years, C has traded in line with the sector returning investors a very similar yield to that of the S&P 500. Citi is quite volatile with a beta of 1.74, this should be taken into account before deciding to put on a position. Below is a YTD performance chart comparing C (blue), BAC (green), JPM (red).
Banks Lowering Estimates
Over the past 3 months bank analysts have been lowering their EPS estimates for the next couple of years, pushing a lot of the bank stocks into Zacks Ranks #3-4 (Hold-Sell). This is due to Federal Reserve’s increasingly dovish verbiage as economic conditions become more and more uncertain. As interest rates drop, so do bank profit margins. An interest rate cut at the end of this month has already been fully priced into the markets.
If this interest rate cut does not come to fruition at the end of July look for a good boost in your favorite bank stocks including JP Morgan JPM, Bank of America BAC, and our previously discussed Citigroup C.
Long-term Outlook of Banks
Financial intermediaries are going to be around for as long as we have an economy to support, but the financial world is quickly shifting. Fintech and cryptocurrencies are starting to reshape the way the world sees money.
Bank stocks like Citi hold some long term risks if they are unable to adapt to the increasing tech-heavy industry. If cryptocurrencies become the universal medium of exchange, these banks better hope they are able to mediate its usage or risk becoming antiquated with the fiat money they currently control.
Citigroup’s earnings beat did not impress investors, and their reaction was muted with the stock down 0.3% in today’s trading. The Fed’s dovish outlook has pushed Citi along with other banks into a Zacks Rank #4 (Sell). This morning’s positive earnings report should give sell-side analysts some optimism about the future EPS results and I would expect this stock to jump to a Zacks Rank #3 (Hold) this week.
JP Morgan and Wells Fargo WFC both report Q2 earnings before the bell tomorrow, with Bank of America following them on Wednesday.
Look for further interest rate guidance from the Jerome Powell and the rest of the Fed prior to their meeting at the end of the month. Any change in outlook would likely have a material effect on these banks’ future outlook.
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Click to get this free report Citigroup Inc. (C) : Free Stock Analysis Report Wells Fargo & Company (WFC) : Free Stock Analysis Report Bank of America Corporation (BAC) : Free Stock Analysis Report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research