The banking sector’s performance has been quite bumpy in 2020. Impressive gains that markets made last year have been completely offset by the novel coronavirus outbreak and concerns surrounding its impacts on the global economy. As a result, both the SPDR S&P Regional Banking ETF (KRE - Free Report) and KBW Nasdaq Bank Index have declined about 40% so far this year.
Like most other companies, shares of Citigroup (C - Free Report) have been affected by the pandemic. Its shares have lost 49.6% so far this year compared with the industry’s decline of 43.5%.
Notably, the bank’s shares tumbled 2.3% yesterday, hitting a 52-week low.
As we all know, banks thrive amid rising rates and strong economic growth. But at present, both seem to be going against banks.
Shares of Citigroup have been impacted by the Federal Reserve’s move to reduce the key interest rate to 0% for the first time since the 2008 financial crisis. Lower rates compress net interest margin (NIM) — the main indicator of a bank’s profitability. Further, growth in banks’ net interest income is expected to get hampered, owing to the interest rate of zero.
Moreover, Citigroup along with several other banks, including Wells Fargo (WFC - Free Report) , Goldman Sachs (GS - Free Report) , JPMorgan (JPM - Free Report) and Morgan Stanley (MS - Free Report) , suspended their share buyback programs till second-quarter 2020. Banks seek to pump the freed-up capital into the economy, which is being adversely impacted by the outbreak.
Owing to these concerns, Citigroup’s profitability will likely get hurt over the next couple of quarters.
However, getting rid of the stock based on the near-term matters would not be a good idea. This is not 2008, when banks had collapsed, resulting in a financial crisis. Once the concerns get resolved, Citigroup is expected to show signs of recovery, driven by its fundamental strength.
Let’s take a look at the company’s key fundamentals:
The bank successfully managed its cost base. Operating expenses have declined, witnessing a CAGR of 1.5%, over the past five-year period (2015-2019). Expenses dipped as the impact of higher volume-related expenses and ongoing investments were more than offset by efficiency savings and the wind-down of legacy assets. Further, for 2020, expenses are predicted to be flat and cost of credit is likely to remain manageable.
Citigroup continues to streamline operations internationally to grow core businesses. Further, the company aims to optimize its branch network, with the focus on core urban markets, improving digital channels and reducing branches. Additionally, the ongoing investments in branded cards support its growth strategy. Such efforts should help augment the company's profitability and efficiency over the long term.
Driven by a solid capital position, Citigroup remains committed toward enhancing its shareholders’ value, with steady capital deployment activities. Notably, following the approval of the 2019 capital plan, the company increased its quarterly dividend by 13.3% from the prior payout in July 2019. Further, the plan includes share-repurchase programs of up to $17.1 billion. Notably, though the dividend payout ratio is below the industry average, the figure indicates a constant improvement in earnings over the past few quarters.
Apart from the above-mentioned factors, Citigroup currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its earnings suggests year-over-year growth of 11.9% for both 2020 and 2021. Further, its long-term (three-five years) projected earnings growth rate of 10.5%, higher than the industry average of 1.5%, promises rewards for investors.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company also has an impressive earnings growth history. In the last three-five years, its earnings grew at a rate of 13.1%.
Moreover, if we compare Citigroup’s current price/earnings (P/E) (F1) and PEG ratios with the industry average, the stock seems to be trading at a discount. Also, it has a Value Score of A. The Value Score condenses all valuation metrics into one actionable score, which helps investors steer clear of “value traps” and identify stocks that are truly trading at a discount.
Therefore, based on the above-mentioned factors, you should hold on to Citigroup stock to get solid returns over time.
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