Citigroup Stock: Valuation Gap Indicates Further Upside


Oct. 29 2019, Published 1:32 p.m. ET

  • Citigroup stock has outperformed the broader markets as well as its peers by a wide margin.
  • The bank’s valuation gap with its peers indicates further upside in the stock.
  • Citigroup stock is up 41.4% year-to-date.

Shares of major US banks have generated stellar returns so far this year despite two rate cuts by the Federal Reserve. Notably, Citigroup (C) stock outperformed its peers as well as the broader markets by a wide margin.

Citigroup stock is up 41.4% year-to-date. The bank’s ability to drive loans and deposits, record growth in non-interest revenues, and demonstrate improved efficiency is driving its stock higher amid a lower interest rate environment.

In comparison, shares of JPMorgan Chase (JPM), Bank of America (BAC), and Goldman Sachs (GS) are up 29.6%, 29.2%, and 30.4%, respectively. Meanwhile, the S&P 500 is up 21.2%.

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We expect the lower interest rate environment to play spoilsport. However, Citigroup’s valuation gap with its peers indicates further upside in its stock. Moreover, growth in loans and deposits, higher branded card revenues, and an increase in non-interest income are likely to drive its top line. Furthermore, cost reduction and share repurchases are expected to drive double-digit growth in Citigroup’s bottom line.

Citigroup stock is trading at a forward earnings estimate of 8.9x. The bank’s valuation is lower than most of its peers. For instance, JPMorgan Chase, Bank of America, Wells Fargo (WFC), and Goldman Sachs stock are trading at forward PE multiples of 12.2x, 10.9x, 12.2x, and 9.3x, respectively.

Notably, analysts expect Citigroup’s EPS to increase at a double-digit rate in the coming quarters, which makes its valuation lucrative. Analysts expect Citigroup’s bottom line to increase about 17% in 2019. Notably, its EPS is projected to increase about 10% in 2020.

Balance sheet expansion, cost reduction to drive growth

Citigroup expects its revenues to increase, reflecting broad-based growth in loans and deposits. Also, growth in non-interest revenue is likely to support its top line. Citigroup marked a 2% growth in its loans in the third quarter. Meanwhile, its deposits increased about 8%.

Management expects loans and deposits to grow in the coming quarters. Meanwhile, expenses are likely to decline sequentially, driving its EPS. However, spread compression could remain a drag, given the lower interest rate environment.

Most of the banks have lowered their net interest revenue outlooks due to the lower deposit spreads. Citigroup expects low interest rates to hurt its top line in the fourth quarter.

Meanwhile, JPMorgan Chase reduced its net interest revenue outlook further. The bank now projects net interest revenues to be lower than $57.5 billion. Previously, JPMorgan Chase lowered its interest revenues guidance from $58.0 billion to $57.5 billion.

Wells Fargo is projecting a 6% drop in its net interest revenues in 2019. Previously, Wells Fargo projected a 5% decline.

Citigroup stock: Analysts see further upside

Wall Street remains upbeat about Citigroup stock. Of the 25 analysts covering the bank, 22 recommend a “buy” rating on Citigroup stock. Two analysts recommend a “hold,” and one analyst recommends a “sell.” Analysts’ consensus target price of $82.85 on Citigroup stock implies a potential upside of 12.6%. This target price is based on its closing price of $73.59 on October 28.

Besides Citigroup, Bank of America is also likely to gain from growth in lending and deposits. The majority of Wall Street analysts are upbeat on Bank of America stock.


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