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Citigroup: Cheap but Risky

Motley Fool Staff, The Motley Fool

In terms of both price-to-earnings and price-to-book ratios, Citigroup (NYSE: C) is by far the cheapest of the big four U.S. banks. However, there's a reason: The bank comes with more risk than the others.

In this clip from Industry Focus: Financials, host Shannon Jones and Fool.com contributor Matthew Frankel discuss Citigroup's risk factors.

A full transcript follows the video.

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This video was recorded on July 9, 2018.

Shannon Jones: Let's actually dive into our third bank, Citigroup. They are reporting earnings on July 13th. Matt, what can you tell us about how Citi does business?

Matt Frankel: I mentioned that Citigroup and Bank of America (NYSE: BAC) were in the same pool coming out of the financial crisis. They both got crushed because of some bad assets on their balance sheet. While Bank of America has done a great job of rebounding, Citigroup has done an OK job of rebounding. I would call them the riskiest of the big four. Let's put that in context, though, because the others are rock-solid banks right now.

There are two things that investors need to know. One, they're still working out what they call their legacy assets on their balance sheet. That's still a pretty big portion of their balance sheet. It's gotten much better over the years, but it's still there. Citigroup is by far, by far the most internationally exposed out of the big four. Not even close to the others. To give you an idea, 53% of their deposit base is international. JPMorgan, which a lot of people think of as a pretty international bank, is only 18% of international deposits. Bank of America is 6%. They're very internationally exposed, especially to some emerging markets that are not doing quite as well as the U.S. right now. That's where a lot of their risk comes from.

In terms of their business, they're structured pretty much the same as JPMorgan and Bank of America in terms of being a combination of commercial bank and investment bank, pretty much in the same proportions. 44% of their revenue comes from consumer banking, while 52% comes from investment banking and institutional sources.

In terms of profitability, as I mentioned, they've done a decent job of picking up their profitability. They're profitable. But not quite as good as Bank of America. Return on equity is 9.7% for the most recent quarter. That's shy of the 10% benchmark you want to see. Return on assets is 0.91%, short of that 1% benchmark. But, Citigroup has done a great job of becoming efficient. They run at a 58% efficiency ratio, which is actually the second best of the big four, to JPMorgan.

It's kind of a mixed bag when it comes to the profitability and efficiency results. They've done a good job of rebounding, but there are still some big risk factors investors need to take into account before jumping into Citigroup.

Jones: Totally agree, I think you hit the nail on the head with the mixed bag. For me, heading into earnings, I love that they're at that 58% efficiency ratio. Like the others, would love to see continued expense management. I would love to see, too, if Citi can hit that 10% return on equity.

I will say, you mentioned that they hit 9.7% in Q1 of this year. That was actually compared to 7.4% in the year prior. Definitely heading in the right direction. We'll see if they can finally get above that 10% threshold. Also, margins have been under pressure for the bank for a while. I'll also be watching that, as well.

Matthew Frankel owns shares of Bank of America. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.