Summary
- It has been nearly three years since I last opined on Citigroup and the stock has since doubled.
- Can I stay behind the stock after this type of return?
- The company just reported earnings this morning and I discuss the key metrics you need to be aware of.
Citigroup (NYSE:C) is one of the largest banks in the United States by assets and has a market capitalization of $ 164 billion based on its current share price of $ 54.17. It is also one of the largest companies in the country following its huge merger with Traveler’s Group in 1998. I should say that at its peak right before the financial crisis of 2008, Citigroup was the largest bank in the world by assets. Many of you have likely done business with the bank in some capacity. The purpose of this article is to discuss this stock as a current investment. I have covered a number of banks of late, and unlike many of its major competitors, I have opined on Citigroup just once. I first got behind the stock in the summer of 2012 at $ 26.28 per share. It has delivered a double since then after I said it looked like a good investment for the next 3-5 years. Well we are approaching the three year mark and the time has come to reassess. It has looked strong in this time frame and over the last 52 weeks has continued to march higher with only a few strong buy on the dip opportunities (figure 1). The question is, can I stay behind the stock at this point?
Figure 1. 52 Week Share Price History of Citigroup Stock
(click to enlarge)
Source: Yahoo Finance
To answer this important question, I will examine in this article the company’s most recent earnings and key metrics, as well as discuss the outlook for the bank, with specific focus strengths and weaknesses. As many of you know I care most about a growing loan and deposit record, a respectable efficiency ratio, as well as revenues and earnings because at the end of the day dividends and stock trading action depend on these metrics. Further, we need a sense of toxic or non-performing assets. These metrics can give us an indication of where the bank is heading. As I have said before with a multinational bank this size, slow and steady improvement is the goal.
Well let me start by saying the bank delivered a top line miss but and bottom line beat against analyst estimates in its Q1 2015. However, I will be clear. The quarter was very solid, especially in comparison to some of its competitors which have reported, like Bank of America (NYSE:BAC). Revenue was unfortunately down year-over-year, but this was the case with several competitors as well. It came in at $ 19.7 billion versus $ 20.2 billion in Q1 2014. However, it is worth mention that these revenues grew nicely quarter-over-quarter as Q4 2014 revenues were only $ 17.9 billion.
Although the revenues were down year-over-year and slightly missed analyst estimates, it is important to note that the company did however significantly improve on the earnings front versus last year’s comparable quarter. In fact it saw net income of $ 4.8 billion, which is an incredible 21% improvement over the $ 3.9 billion the company raked in during Q1 2014. Furthermore, the company was able to reduce operating expenses by 10% year-over-year in part due to its cost savings initiatives and lower legal expenses. They came in at $ 10.9 billion versus $ 12.1 billion in Q1 2014. Certainly moving the needle in the right direction for this important metric.
The biggest key metrics I look for in a bank are of course the efficiency ratio, as well as loan and deposit growth. Let’s start with the efficiency ratio. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the basis points the company earns over the cost of funds. The stronger banks have efficiency ratio under 60% with the ideal being around 50%. Well, Citigroup’s subsidiary, Citicorp which makes up the bulk of revenues saw an efficiency ratio come in at an outstanding 54%. This is the best ratio of the banks I have covered of late.
Now, the other keys I look for are loan and deposit growth. On this front the bank is actually moving in the wrong direction, but it is due primarily to its Citi Holdings. Citicorp actually saw growth here. Overall, Citigroup’s loans were $ 621 billion total to end Q1 2015. This is down 7% Q1 2014, and adjusting for currency, is down 3% on a constant dollar basis. In constant dollars, there was a 2% growth in Citicorp loans. But again this was offset by continued declines in Citi Holdings. Total average deposits also dipped). Total average deposits were $ 900 billion in Q1 2015. This also down 7% from Q1 2014, dropping 3% in constant dollars. But you should be aware that Citicorp grew deposits by 3% overall, but the 80% decline in Citi Holdings deposits drove the overall total deposits lower. Normally these numbers would be disturbing, but I think investors need to really be focused on the growth from Citicorp and less concerned by what is happening as Citigroup continues to move assets out of Citi Holdings. Finally, we need to be aware of nonperforming assets. I was pleased to see Citigroup asset quality improve as total non-accrual assets fell to $ 7.0 billion, a huge 22% decline from Q1 2014. Further, corporate non-accrual loans declined 28% to $ 1.2 billion and consumer non-accrual loans declined 20% to $ 5.6 billion.
While this article has shown the bank is performing a bit poorer than we would like to see on the revenue side of things there were some notable strengths. The efficiency ratio is absolutely stellar, and I think it can improve so long as operating expenses keep moving lower thanks to Citigroup’s cost savings initiatives. Although total loans and deposits are declining, digging deeper we see improvement in these metrics from Citicorp, which is responsible for the bulk of Citigroup’s performance. The bank is also seeing substantial declines in non-performing assets which I find to be critical. All in all, with earnings as strong as they were and the bank continuing to perform admirably, I am staying behind this stock. It is only a matter of time until shareholders will start to see some real dividends once again, and I think the bank is well positioned to benefit from rising interest rates.
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