Citi Stock: Cheap Valuation and Improving Values ​​Make this a buy

given from Citigroup (NYSE:C) significant growth opportunities and its extremely low valuation, I consider C stock a buy. While the bank, like all of its US peers, faces challenges going forward, I believe the stock’s low valuation reflects more than the likely impact of the risks they face.

As with all major US banks, Citi is likely to benefit from significant improvements in its wealth management, investment banking and trading businesses amid the likely soft landing of the US economy and lower interest rates. Indeed, these trends have already begun to materialize.

On the other hand, the institutions’ credit card and mortgage businesses, along with their net interest income, are likely to face significant challenges going forward. Even the growth of their commercial and industrial divisions could slow.

However, given C stock’s anemic valuation, it is solid balance sheet, the improvements it has made and its opportunities, the risk/reward ratio is quite positive at the moment.

Citi opportunities in the Soft Landing environment

The US economy appears to be in the midst of a soft landing, which will see significantly slower but significantly positive growth along with significant interest rate cuts by the Federal Reserve. Providing evidence for this thesis, growth in the US labor market appears to be slowing significantly, but the ISM Services Purchasing Managers’ Index edged up slightly to 51.4 in August from 51.4 in July and remained well above the 50 level that separates expansion from contraction. .

Moreover, on September 9, the Atlanta Fed raised its estimate for real GDP growth in the third quarter to 2.5% from 2.1%. Also importantly, inflationary pressures continue to appear to be easing. Put it all together, and it looks like we’re heading back to the low-inflation, low-interest-rate, steady-growth macroeconomic environment that equity investors loved between about 2010 and the early 2020s.

Also supporting my forecast for a soft landing, CFO Mark Mason, speaking on a September 9 conference call, reported that Citi economists expect “a relatively soft landing” to materialize.

In this environment, barring a black swan event, stocks should generally continue to rise steadily, benefiting from Citi’s trading operations, and wealthy individuals should be more likely to cash out more money market funds and give them to wealth managers. Citi’s wealth management unit should be boosted by the latter trend. Moreover, with interest rates falling, M&A activity should pick up significantly.

Judging by Citi’s Q2 results reported on July 12, these trends are already starting to materialize. In fact, its investment banking unit’s revenue rose 60% year-over-year to $853 million, while its wealth management unit’s net income rose to $210 million from $84 million in the same period last year. Also notably, sales of its equity markets unit rose 37% year-on-year to $1.5 billion.

Moreover, on September 9, Mason stated that M&A activity is accelerating significantly.

If Citi’s investment banking unit revenues grow another 60% over the next year, while equity revenues grow 50% year over year, those two developments alone will increase the bank’s total sales by 1.25 billion dollars or by about 6%.

Citi faces significant threats

Banks’ net interest income tends to fall when the Fed cuts rates and interest rates fall. Illustrating this trend, JPMorgan’s chairman revealed on September 10 that analysts’ average NII estimate for the bank in 2025 was too high due to future Fed rate cuts. Citi, whose NII is down 3% from last year, is likely to suffer further NII declines as rates fall. Indeed, Mason, Citi’s chief financial officer, indicated that the bank’s NII would likely decline “modestly” this year.

That makes sense because most economists in a Reuters poll on Sept. 10 expected the Fed to cut rates by 25 basis points in each of the next three meetings.

Slowing consumer spending and higher credit card charge-off rates may also negatively impact Citi’s financial results going forward. Providing evidence for the latter, Mason reported that “credit rates are starting to come down a bit” while discretionary spending is down among consumers overall, with the wealthy accounting for all or most of it. of increased consumer spending.

And Citi is likely to be affected by the problems in the commercial real estate sector. However, the bank’s allowance for loan losses stands at 2.5% of its gross loans, and this is almost a percentage point higher than the commercial bank average.

While the bank’s consumer mortgage business could also be hurt by the slowing labor market, the cut in interest rates should greatly ease the pain for both businesses.

Citi has improved significantly

Historically, Citi has specialized in serving overseas markets. As a result, regulators required the bank to hold more capital than its peers. Furthermore, I would argue that this characteristic has resulted in C-shares being seen by many investors as significantly riskier than its peers. As a result, the bank’s overseas focus has probably weighed heavily on the stock over the years.

But TipRanks pointed out that “Citi has sold (some of) its international retail banks.” For example, in a move that could prove very fortuitous given China’s significant economic problems, Citi sold its China consumer wealth unit last October. And after the bank revealed in 2021 that it would divest 14 of its foreign consumer businesses, it successfully offloaded eight of them last October.

Moreover, Citi has improved its balance sheet a lot in recent years. In fact, as of last May, its assets-to-equity ratio of about 11.7 times was lower than JPMorgan’s equivalent ratio of about 12.15 times.

And last but not least, Citi is significantly reducing its costs. Since April, it has “laid off or provided layoff notices to 7,000 employees” as part of its reorganization plan. It plans to cut 20,000 workforce members by 2026.

The risks facing Citi

Given the significant problems facing many Asian and European economies, Citi’s overseas business could perform much weaker than expected going forward.

And of course, the soft landing forecast that Mason and I both embrace could turn out to be inaccurate, sending the US into a recession. In that case, many, if not most, of Citi’s US businesses would likely perform significantly worse than expected. Finally, real estate may not be protected from lower rates as much as they think, causing the company’s lending business to underperform over the medium term.

Citi’s favorable rating

On the valuation front, C shares are changing hands at a forward price-to-earnings ratio of 10.1 times. This is significantly below the sector median of 12 times. Similarly, its forward price-to-book ratio is just 0.57 times, more than 50% below the sector median of 1.17 times. Also of note is that its forward non-GAAP PEG ratio of 0.38 is well below the sector median of 1.24 times.

In addition, JPMorgan (JPM) and Wells Fargo (WFC) have forward price-earnings ratios of 11.5 and 10.6, respectively. These ratios are significantly above Citi’s forward P/E ratio. JPM’s forward price-to-book ratio is 1.78 times, well above Citi’s level of 0.57, while WFC weighs in at a forward P/B ratio of 1.1. JPMorgan and Wells Fargo’s non-GAAP PEG forward ratios are 2.96 and 1.26, respectively, well above Citi’s level of 0.38.

Bank of America (BAC)meanwhile, it has a forward P/E ratio of 12, placing it well above Citi’s equivalent ratio of 10.4. BAC’s forward P/B ratio is 1.1, compared to Citi’s 0.57, and BAC’s forward PEG ratio is 1.2, compared to Citi’s 0.38.

Conclusion on Citi

Several of Citi’s key businesses should get a big boost from the soft landing in the US economy and the Fed’s upcoming rate cuts. Moreover, the bank’s rating is quite low and it has taken several steps to improve its performance going forward.

Going forward, these factors should far outweigh the bank’s challenges, including NIM pressure and higher credit card charge-offs and mortgage issues. As a result, I consider C stock a buy.