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Citi Among Worst Q3 Players Despite a Strong Finance Sector

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Despite decent performance of the overall Finance sector in the third quarter, Citigroup (C - Free Report) disappointed investors as reflected by its price performance. Shares of the company depreciated 15.6% in the July-September period compared with the industry’s 2.1% decline. The stock also lagged the S&P 500’s rally of 8.5% in the same time frame.

Like many other companies, performance of Citigroup has been affected by the pandemic. However, recent developments regarding faults in the company’s risk management systems, CFO’s comments on disappointing revenue performance in third-quarter 2020 and other legal issues pulled the stock even lower.

Price Performance

Factors in Detail

Citigroup witnessed a major setback when in mid-September The Wall Street Journal reported that the bank may have to face a public rebuke from The Office of the Comptroller of the Currency and the Federal Reserve. This was due to its failure to improve its risk management systems and procedures.

Notably, Citigroup was expected to face a consent order that would make it necessary for the company to take some immediate action and improve its faulty controlling systems.

Further, the stock met with investors’ pessimism when CFO Mark Mason said that he expects additional reserves to be created in the third quarter. Also, overall revenues are expected to decline in the high single-digit range on a year-over-year basis due to the impact of lower rates and reduced levels of business activities due to COVID-19.

The company’s legal encounters during the quarter were another key reason for the stock ending in red. In August, Citigroup had accidently transferred about $900 million to the creditors of renowned cosmetic company, Revlon. The lender was able to recover some of the amount and stated that it was a clerical error.

Further, at the end of September, Citigroup agreed to pay $4.5 million in fine to a U.S. regulator for losing millions of audio files, including recordings it had subpoenaed despite being warned of faults in its audio preservation system.

Citigroup’s declining fee income posed another key headwind. It witnessed a five-year negative CAGR (2015-2019) of 2.9%, with some annual volatility due to dismal performance of equity-market revenues and volatile underwriting business. Though income increased in the first six months of 2020 with help from the company’s efforts to diversify consumer business, it would not be of much support in the near term due to subdued activities.

Though this Zacks Rank #4 (Sell) stock performed remarkably well in 2019 and surged 53.4%, outperforming both the industry and S&P 500 rally of 35.2% and 27.6%, respectively, the above-mentioned concerns are likely to have hurt investor sentiments.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, Citigroup has an unimpressive Growth Score of F. Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. Therefore, the stock does not look promising at present.

Performance of Finance Sector

Overall, the Finance sector performed decently during the quarter, evident from the S&P 500 Financial’s gain of 3.8% in the period. Also, Financial Select Sector SPDR Fund (XLF - Free Report) rose 4% during the same time frame.

Capital markets’ activities continued to show strength in the third quarter with global M&As back with a bang. Likewise, IPO activities rebounded, with the third quarter being one of the busiest since 2000. Thus, investment banks must have benefitted from the rise in these activities.

Also, strong equity markets resulted in rise in asset values, thereby, supporting asset managers. Further, continued volatility in the markets kept trading desks busy, leading to rise in client activities and helping brokers earn higher related fees.

Some of the notable performers during the third quarter were Berkshire Hathaway (BRK.B - Free Report) , up 19.3%, SVB Financial Group , gaining 11.7% and Discover Financial (DFS - Free Report) , up 15.3%.

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