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Here’s What to Expect from Citigroup’s Second Quarter

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Expected growth in lending and deposit

Citigroup (C) plans to announce its second-quarter results before the markets open on Monday, July 15. We expect the bank’s top and bottom line to improve on a YoY basis. We expect Citigroup’s net interest income to continue to grow driven by continued growth in loans and deposits. Meanwhile, improved efficiency led by cost reduction combined with share repurchases are likely to drive double-digit EPS growth.

Management expects net interest income to rise by at least $2 billion in 2019. Credit growth and an increase in deposits are likely to support Citigroup’s net interest margin even in the absence of a rate hike. However, the rate of growth in lending and deposits could soften a bit amid increased competition. Also, revenues from market-sensitive products could remain a drag.

Citigroup’s bottom line is expected to gain from reduction in expenses, improvement in asset quality, and share repurchases. Also, a lower effective tax rate is likely to support its second-quarter bottom line. During the last reported quarter, Citigroup’s operating expenses declined by about 3%. Meanwhile, the efficiency ratio improved by 90 basis points to 57.0%, which was impressive.

Consensus estimates

Citigroup has a strong history of beating Wall Street’s EPS estimates as can be seen in the graph below. As for the second quarter, analysts expect Citigroup to post adjusted EPS of $1.83 per share, which implies YoY growth of 12.3%. Notably, Citigroup’s bottom line has grown at a strong double-digit rate in the past several quarters. On average, the bank’s adjusted EPS marked about 25% growth in each quarter of 2018. Meanwhile, Citigroup’s bottom line rose about 11.3% in the first quarter of 2019 despite tough comparisons and lower revenues.

Wall Street expects Citigroup to report revenues of $18.7 billion, implying YoY growth of 1%. Higher net interest income is expected to drive its second-quarter revenues.

Valuation, rating, and target price

Citigroup stock recorded stellar growth so far this year. Despite the strong growth, Citigroup stock still trades at a low valuation multiple, indicating further upside left. Citigroup stock trades at a forward PE multiple of 9.0x, which is lower than the majority of its peers. Shares of JPMorgan Chase, Bank of America, and Wells Fargo are trading at a forward PE multiple of 11.2x, 10.0x, and 10.2x, respectively. Goldman Sachs trades at a slightly lower valuation than that of Citigroup. However, its revenues and EPS are expected to stay low in 2019.

Notably, Citigroup’s bottom line is expected to mark 13.3% growth in 2019, which makes its stock attractive on the valuation front. Among the 28 analysts covering Citigroup, 24 recommend a “buy,” and four analysts have a “hold” rating. Wall Street’s consensus target price of $80.40 per share on Citigroup implies a potential upside of about 13% based on its closing price of $71.13 on July 8. Moreover, on July 9, JP Morgan raised its target price on Citigroup stock to $77 per share from $75.

Stock performance

Citigroup stock is up 36.6% on a YTD basis as of July 8. Shares of Citigroup outperformed the broader markets as well as its peers in terms of growth. Shares of other major US banks have marked healthy gains so far this year but significantly lags Citigroup in terms of growth. Goldman Sachs (GS), Bank of America (BAC), JPMorgan Chase (JPM), and Morgan Stanley (MS) are up 23.2%, 18.5%, 15.6%, and 9.7%, respectively, on a YTD basis. In comparison, the S&P 500 Index increased by 19.3% so far this year.

Wells Fargo (WFC) stock rose 3.1% so far this year. However, it underperformed peers as a decline in lending and deposits took a toll on its net interest income.

Citigroup’s ability to drive net interest income even in the absence of rate hikes, efficiency savings, and robust EPS growth is likely to support its stock. Moreover, the bank’s low valuation and healthy EPS growth could drive its stock further.

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