Citigroup (C, Financial) is reportedly expanding its global network-based wealth management service in South Korea, one of the world’s largest economies.
Valuations
Despite the recent run-up in financial stocks secondary to expected interest-rate hikes this year, Citigroup still trades below its book value and compared to its peers.
According to GuruFocus, the $165.4 billion had a trailing price-earnings (P/E) ratio of 12.7 times vs. industry median 13.6 times, a price-book (P/B) value of 0.81 times vs. industry median 1.17 times and a price-sales (P/S) ratio of 2.5 times vs. 3.3 times.
Citigroup had 0.88% trailing dividend yield and 9% payout ratio.
Using Reuters data, Citigroup also had forward P/S and P/E ratios of 2.32 times and 11.5 times in 2017 average sales and earnings per share expectations.
Total returns
Citigroup underperformed the broader Standard & Poor's 500 index in the past half decade. According to Morningstar data, the bank delivered a 0.93% total return so far this year compared to S&P 500’s 6.07%. In the past five years, Citigroup delivered 10.7% return compared to the index’s 13.3%.
Earnings performance
Citigroup reported its fourth quarter and fiscal 2016 results in January. In 2016, the bank delivered 8.5% lower in sales to $69.9 billion and 13.5% lower in profits to $14.9 billion – a 21.3% profit margin compared to 22.6% in 2015.
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“We had a strong finish to 2016, bringing momentum into this year. We drove revenue growth in our businesses and demonstrated strong expense discipline across the firm. We achieved a full-year Citicorp efficiency ratio of 58% as we had targeted while again increasing our loans and deposits.
“This quarter marks the last time we will report the results of Citi Holdings separately. At its peak, Holdings had over $800 billion in assets, generating sometimes multibillion-dollar losses in a single quarter. Today Holdings’ $54 billion of assets are only 3% of Citigroup’s balance sheet and, for the tenth quarter in a row, Holdings was profitable.
“Our core businesses are beginning to produce the returns our investors expect and deserve. In 2016, we returned nearly $11 billion in capital to our shareholders. Even with this capital return, we ended the year with a Common Equity Tier 1 Capital ratio of 12.5%, 40 basis points higher than when we started the year, showing the capability of this franchise to consistently generate and return significant amounts of capital.” – Citi CEO Michael Corbat
Citigroup
According to filings, Citigroup’s history dates back to the founding of the City Bank of New York in 1812.
Citigroup is a global diversified financial services holding company whose businesses provide consumers, corporations, governments and institutions with a broad yet focused range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management.
(Citigroup Segments, 10-K)
Citigroup operates two primary business segments: Citicorp and Citi Holdings.
Citicorp
Citicorp consists of Citi’s Global Consumer Banking businesses and Institutional Clients Group.
(10-K)
Global Consumer Banking businesses
Global Consumer Banking businesses are conducted in three geographic segments: North America, Latin America and Asia.
North America: revenue grew 1.2% to $19.96 billion or 28.7% of total Citigroup sales*. The division delivered 16.8% income margin compared to 21.9% in 2015.
Latin America: revenue fell 13.88% to $4.97 billion or 7.2% of total sales*. The segment reported 13.5% margin compared to 15% in 2015.
Asia: revenue fell 2.4% to $6.84 billion or 9.8% of total sales* and delivered an income margin of 15.8% compared to 17.1% in 2015.
*Excluding corporate and other revenue
Overall Global Consumer Banking sales fell 2.3% in fiscal 2016 and delivered an income margin of 16% compared to 19.6% in 2015.
(10-K)
Institutional Clients Group
The Institutional Clients Group segment is further divided into four geographic segments: North America, EMEA, Latin America and Asia.
North America: revenue fell 1.26% to $12.8 billion or 18.5% of total Citigroup sales* and delivered an income margin of 28.7% compared to 27.1% in 2015.
EMEA: revenue grew 0.71% to $10 billion or 14.4% of total sales* and reported 24.7% income margin compared to 23.5% in 2015.
Latin America: revenue fell by 0.62% to $4 billion, or 5.8% of total sales*, and delivered 36.8% Â –Â highest among all divisions –Â compared to 34.4% in 2015.
Asia: revenue fell 0.34% to $6.98 billion or 10% of total sales* and delivered 32.9% income margin compared to 32.5% in 2015.
*Excluding corporate and other revenue
Overall, Institutional Clients Group sales fell 0.41% and reported an income margin of 29.3% compared to 28% in 2015.
(10-K)
Citi Holdings
Citi Holdings consists of businesses and portfolios of assets that Citigroup has determined are not central to its core Citicorp businesses.
In 2016, Citi Holdings sales fell sharply by 57% to $3.85 billion or 5.5% of total sales* and reported an income margin of 15.7% compared to 11% in 2015.
According to Citigroup the marked sales decline was mainly reflecting the continued reductions in Citi Holdings assets and lower net gains on asset sales.
Further, the bank will no longer report the results of Citi Holdings separately beginning in the first quarter of 2017 and Citi Holdings will cease to be a separately reported business segment.
Sales and profits
(10-K)
On a three-year average, Citigroup had sales losses of 2.9% and profit growth and margin averages of 2.9% and 17.8%.
Financial metrics
(10-K)
Net interest margin
Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities (Investopedia).
In 2016, Citigroup recorded a net interest margin of 2.86% compared to 2.93% in 2015. On a quarterly comparison, the bank had a net interest margin of 2.79% in the fourth quarter of 2016 compared to 2.92% in the fourth quarter of 2015.
(10-K)
Return on average assets
Return on assets gives an idea as to how efficient management is at using its assets to generate earnings (Investopedia).
In 2016, Citigroup delivered a return on average assets of 0.82% compared to 0.95% in 2015.
Return on equity ratios
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia).
Return on tangible common equity
Tangible common equity (TCE), as defined by Citi, represents common equity less goodwill and other intangible assets.
In 2016, Citigroup’s return on TCE declined to 7.6% from 9.3% in 2015.
Return on average and total common stockholders’ equity
The return on average common stockholders’ equity (ROCE) is calculated using net income less preferred stock dividends divided by average common stockholders’ equity. Meanwhile, the return on average total Citigroup stockholders’ equity (ROTCE) is calculated using net income divided by average Citigroup stockholders’ equity.
In 2016, ROCE and ROTCE were 6.6% and 6.5% compared to 8.1% and 7.9% in 2015.
(Financial Supplement)
Provision for credit losses
The provision for credit losses is treated as an expense on the company's financial statements as expected losses from delinquent and bad debt or other credit that is likely to default and be unsatisfied (default probability; Investopedia).
Total provisions for credit losses and for benefits and claims in 2016 fell by 12% to $6.98 billion.
(10-K)
Capital adequacy in tier 1
Tier 1 capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations (Investopedia).
Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets.
In 2016, Citigroup’s Tier 1 Capital ratio improved to 12.57% from 12.07% in 2015.
(10-K)
Efficiency ratio (total operating expenses/total revenues)
The efficiency ratio is typically used to analyze how well a company uses its assets and liabilities internally (Investopedia).
In 2016, Citigroup’s efficiency ratio was at 59% compared to 57% in 2015.
Sales and profits
(10-K)
In the past three years, Citigroup had sales decline of 3%, profit growth and margin averages of 25.3% and 17.8%.
Cash, debt and book value
As of December, Citigroup had $23 billion in cash and due from banks and $236.9 billion in short-term borrowings and long-term debt leading to a debt-equity ratio of 1.15 times compared to 1.08 times in 2015.
Of Citigroup’s $1.8 trillion assets 1.5% is in goodwill and intangibles. The bank also had a book value of $226 billion compared to $223 billion 2015.
Meanwhile, tangible book value per share –Â book value minus goodwill and intangibles –Â grew 6.5% to $64.57 per share.
Cash flow
(10-K)
In 2016, Citigroup grew its cash flow from operations by 35.7% to $53.9 billion. The bank recorded improved cash inflow mainly from trading account liabilities and loans held for sale from prior-year operations.
Capital expenditures on premises and equipment and capitalized software were $2.76 billion leaving Citigroup with $51.2 billion in free cash flow compared to $36.5 billion in 2015.
(10-K)
As observed, Citigroup has grown its dividend and share repurchases in recent years. In 2016, the bank allocated 22.6% of its free cash flow in such payouts. Citigroup also issued $2.5 billion in preferred shares in the period.
Citigroup also allocated $13.69 billion in investment purchases net proceeds from sales and maturities.
(10-K)
Further, Citigroup generated $18 billion cash flow from short- and long-term debt issuance net repayments. The bank also gathered $24.4 billion in change in deposits.
Conclusion
Citigroup experienced a challenging year in 2016.
Almost all of its segments experienced decline in performance, including a 57% business sales reduction in Citi Holdings. According to filings, Citi Holdings contains the remaining businesses and portfolios of assets that Citigroup has determined are not central to its core businesses.
The bank also seemed to have a more leveraged balance sheet compared to its 2015 figures. Nonetheless, Citigroup generated admirable free cash flow despite weakened business performance.
In January, UBS resumed a sell outlook on Citigroup while Barclays reiterated an overweight recommendation on the bank.
Twenty-seven analysts had an average price target of $64.22 –Â a 7.4% increase from Monday’s share price of $59.82. Meanwhile, a 37% upside remains should Citigroup trade at its current book value of $226 billion.
In summary, Citigroup is a hold with $64 price target.
Disclosure: I do not have shares in any of the companies mentioned.
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