Citigroup Inc.’s (C Quick QuoteC - Free Report) shares have been dominated by the bears throughout 2021. So far in the year, shares of this S&P 500 member have dipped 2.4% against the industry’s and index’s rallies of 31.4% and 26.8%, respectively.

This is in stark contrast to the bigwig’s competitors, JPMorgan Chase & Co. (JPM Quick QuoteJPM - Free Report) , Bank of America (BAC Quick QuoteBAC - Free Report) , Morgan Stanley (MS Quick QuoteMS - Free Report) and Goldman Sachs (GS Quick QuoteGS - Free Report) that have performed decently on the bourse.

JPMorgan, Bank of America, Morgan Stanley and Goldman Sachs have rallied 23.7%, 46.5%, 44.9% and 46%, respectively.

A major part of Citigroup’s revenues (60% as of 2020 end) is generated from the Institutional Clients Group (ICG) that consists of banking, and markets and securities services, whereas the Global Consumer Banking (GCB) (40%) business includes retail banking and wealth management, Citi-branded cards and Citi retail services.

While the fourth-largest bank enjoys competitive strength in the ICG business, its GCB segment has been troublesome. Investors have considerably lost their confidence in Citigroup, courtesy stringent regulatory scrutiny, higher stress capital buffer (“SCB”) requirement, declining GCB revenues, a low-interest-rate environment and near-term bottlenecks owing to its transformation strategy, which resulted in a wipeout for the stock this year.

Year-to-Date Price Performance Chart

Image Source: Zacks Investment Research

Moreover, at a recent conference, management offered uninspiring projections for the fourth-quarter and full-year 2021.

For the December-end quarter, the company expects consumer revenues to increase sequentially but fall in mid-single digits on a year-over-year basis. Due to continued normalization in fixed income trading, overall fourth-quarter trading revenues are anticipated to be flat to modestly down from fourth-quarter 2019 reported levels.

Also, 2021 revenues are anticipated to decline in the mid-single-digit range on a full-year basis, while expenses are likely to increase in the mid-single digits, excluding any divestiture-related impacts. These have further flared up investor skepticism.

The Zacks Consensus Estimate for Citigroup’s 2021 revenues is pegged at $71.1 billion, indicating a year-over-year decline of 4.4%.

2021 Nemesis

Like other banks, there was no escape from industry headwinds for Citigroup in 2021. Low interest rates took a toll on loans and margin growth, compelling banks to consolidate and explore other avenues for fee-income growth.

Continued weakness in the Asia GCB segment has been affecting Citigroup’s operating results. Hence, shortly after Jane Fraser was appointed to lead the bank, she bit the bullet with a long-needed decision to wind down inefficient and less-profitable GCB business divisions in 13 markets across the Eastern Hemisphere that lack the scale to compete. This will free up capital to facilitate a pivot to other high-quality businesses like international wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth.

While the overhaul is set to drive the company’s performance in the long term, investors' response has not been encouraging so far. And rightfully so, as the initial exits have not been smooth. The sale of its Australia consumer business, while announced at a slight premium, ended up resulting in a pretax loss on sale of $680 million in third-quarter 2021.

Also, the bank plans to wind down its South Korea consumer banking business. This is projected to result in significant cash charges of $1.2-$1.5 billion from the fourth quarter of 2021 through 2022.

Other than this, Citigroup must also address regulatory issues that have spurred a lot of skepticism. The company has been revamping its underlying technology, risk management and internal controls as part of remediation highlighted by the Office of the Comptroller of the Currency and the Federal Reserve. This along with elevated regulatory costs and litigation provisions is escalating expenses for Citigroup and will likely hurt bottom-line growth in the near term.

Following the Federal Reserve’s stress test results in June, Citigroup’s requirement increased from 2.5% to 3%, beginning fourth-quarter 2021, for a four-quarter window. The company’s higher SCB has led to higher capital requirements, reducing flexibility to deploy capital in share buybacks and dividends. Subsequently, Citigroup refrained from announcing a dividend hike in stark contrast to the likes of Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America that raised dividend by 100%, 60%, 11% and 17%, respectively.

Also, in fourth-quarter 2021, Citigroup paused share repurchase for the fourth quarter. The decision was made to “create capacity” and mitigate the impact of the new rule — Standardized Approach for Counterparty Credit Risk (SACCR) — related to derivatives risks that increased its risk-weighted assets (RWA).

The near-term bottlenecks have been uninspiring for the company’s stock.

Will 2022 Bring Better Tidings?

Despite the short-term challenges that Citigroup is handling, the company’s current robust business position and improving macro-economic outlook bode well for long-term growth. Economic rebound is also set to drive loan demand, substantially improving banks’ profitability.

Also, at its latest meeting, the Fed telegraphed a quicker conclusion to the bond-buying efforts, thereby positioning the central bank to hike the ultra-low interest rates next year sooner than expected. This comes as a breather for banks and will improve margins and net interest income (NII), which accounts for a major part of the top line.

Also, Citigroup had $323.9 million of cash and deposits with banks, as of the third quarter-end. Hence, with any rise in interest rates, the excess cash can be deployed in high interest-earning avenues, aiding interest income growth.

Also, the company anticipates the release of roughly $7 billion (in aggregate) of allocated tangible common equity over time from GCB market exits. As capital from consumer franchise disposals is released in 2022, we expect much bigger share buybacks at the later end of 2022, which will drive the stock price. The company’s focus on wealth management business in affluent markets will also benefit it from a strong brand name and aid revenue growth.

While the first two market exits have been rough, all other Asian consumer disposals are reported to be on track for completion in early 2022. Last week, the bank announced plans to withdraw the consumer banking business in the Philippines by selling the franchise to UnionBank for a cash consideration for the net assets of the sold businesses along with a premium of PHP45.3 billion (around $908 million).

The outlook for Citigroup’s ICG business also remains promising. The company’s equities trading business is expanding and taking additional market share.

Also, the company’s Trade & Treasury Services ("TTS") arm, a proprietary closed-loop banking system benefiting from a wide banking footprint, is poised to generate higher returns as the management aims to grow this business. Leading debt and equity underwriting, and M&A advisory businesses also diversify ICG revenues and offer high returns.

Parting Thoughts

Although Citigroup has received ample criticism due to its relatively weaker returns, the company appears to implement sweeping changes and appropriate long-term measures compared to making do with short-term tactical fixes to satisfy near-term financial targets.

It seems that the bank is not getting enough recognition from the market for its major transformation plan. Rising expenses and challenged revenues clearly seem a near-term downside only. Moreover, given the strength in its ICG business model, and a probable rise in interest rates, the company is poised to amplify earnings growth in the upcoming period.

These will likely help the company to regain shareholders interest in the stock.

We now look forward to the company’s investor’s day to be held on Mar 2, 2022, where the company is expected to provide an update on its expense trajectory and update on the transformation process.

Citigroup carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

At $60.21 per share, Citigroup is currently trading at a price/tangible book value of 0.77X. Hence, as its fundamentals remain strong, Citigroup’s beaten-down stock price and cheap valuation might be a good entry point for investors.