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BofA or Citi: Which Big Bank is Better Poised Amid Rate Cuts?

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The biggest concern for banks at present is lower interest rates, which is putting strain on their net interest margins and revenues. The Federal Reserve cut interest rates thrice this year with an aim to support the U.S. economy amid trade war concerns. However, it intends to keep rates unchanged unless there is further deterioration in the situation.

So, for banks, which are the biggest beneficiaries of higher rates, the current backdrop is a bit challenging.

Nonetheless, decent loan demand, efforts to further digitize operations, changing revenue mix and improving economy are likely to continue driving banks in the quarters ahead. Also, a strong balance sheet position and solid liquidity levels will support their financials in the long run.

So, today we are focusing on two big banks – Bank of America (BAC - Free Report) and Citigroup (C - Free Report) – with market capitalization of $298.5 billion and $163.5 billion, respectively. As both the stocks carry a Zacks Rank #3 (Hold) and have almost similar business operations, we are using certain other parameters to give investors a better insight. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Both the companies have outperformed the industry (up 29.9%) so far this year. While shares of BofA have rallied 34.7%, Citigroup has surged 43.8%. So, Citigroup has performed better than BofA.

Year-to-Date Price Performance

Capital Deployment

Both the banks have been meaningfully deploying capital in terms of dividend payments and share repurchases to enhance shareholder value.

BofA received the Fed’s approval for its 2019 capital plan that includes a 20% quarterly dividend hike and a share repurchase authorization worth $30.9 billion. In aggregate, the bank intends to return roughly $37 billion to shareholders. It has a dividend yield of 2.17%.

Following the Fed’s approval for its 2019 capital plan, Citigroup announced a 13.3% dividend hike and $17.1 billion share repurchase authorization. So, the company intends to deploy capital worth $21.5 billion.

Therefore, BofA has an edge over Citigroup here (in terms of total return to shareholders).

Leverage Ratio

Both BofA and Citigroup have a higher debt-to-equity ratio compared with the industry average of 0.91. But BofA, with a leverage ratio of 0.99, has an edge over Citigroup with the same of 1.36.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12 months for BofA and Citigroup is 12.05% and 10.16%, respectively. Though both the companies lag the industry’s average of 12.15%, BofA is bit better positioned than Citigroup.

Earnings Estimate Revisions & Growth Projections

Analysts seem to be bullish on BofA’s financial performance. Thus, the Zacks Consensus Estimate for 2019 earnings has moved slightly upward over the past 30 days. Further, the consensus estimate for earnings is pegged at $2.69 for 2019, indicating growth of 3.1% from the year-ago reported figure. The stock has a long-term expected earnings growth rate of 9%.

On the other hand, Citigroup’s consensus estimate for 2019 earnings has remained unchanged over the past 30 days. The Zacks Consensus Estimate stands at $7.74 for the current year, implying an increase of 16.4%. The stock has a long-term expected earnings growth rate of 11.6%.

Therefore, this round is biased toward Citigroup.

Sales Growth Projections

For BofA, the Zacks Consensus Estimate for sales is pegged at $91.2 billion for 2019, suggesting a slight fall from the prior-year reported figure.

For Citigroup, the consensus estimate for sales stands at $73.9 billion, indicating growth of 1.4%.

Therefore, Citigroup has an edge here too.

Valuation

BofA seems overvalued when compared with the broader industry. Its current price-to-sales and price-to-earnings (F1) ratios are above the respective industry average.

Citigroup, on the other hand, seems undervalued when compared with the broader industry. Its current price-to-sales and price-to-earnings (F1) ratios are lower than the respective industry average.

Also, Citigroup has a Value Score of B. The Value Score condenses all valuation metrics into one actionable score that helps investors steer clear of “value traps” and identify stocks that are truly trading at a discount. Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.

Hence, Citigroup holds the edge over BofA here.

Conclusion

Our comparative analysis indicates that Citigroup is poised better than BofA when considering price performance, favorable earnings estimate revisions, earnings and sales growth expectations, and undervaluation. BofA wins on better capital deployments, ROE and superior leverage ratio.

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