With US economic recovery well entrenched, Citigroup (US: C) is recovering - yet the US lender's shares remain cheaply rated for its sector. That discount, however, appears churlish given the progress it has made since the US government's bail-out in November 2008 - which involved backing over $300bn (£178bn) in assets and directly investing around $20bn in the lender. Indeed, by 2010 Citigroup had returned to profitability and the US government had sold its remaining stake.
- Rapidly recovering US economy
- Credit quality improving fast
- Well capitalised
- Shares cheaply rated compared with peers
- Weak dividend prospects
- Hit by big compensation payouts
First-quarter figures last month revealed more evidence of recovery. Loan loss provisions, for example, fell 19 per cent year on year, which helped first-quarter pre-tax profit to jump 9 per cent in the year to the end of March to $6bn, while the loan book rose 7 per cent to $575bn. Moreover, with a Basel III tier-one capital ratio of 10.4 per cent, Citigroup is among the best capitalised of the US banks.
That progress significantly reflects healthier economic conditions. Certainly, a harsh winter did hit first-quarter US economic growth - but that's temporary. The IMF expects the US economy to grow 2.8 per cent in 2014 and by 3 per cent in 2015 - leaving America with one of the fastest-growing economies in the developed world. That should drive credit demand, which will boost Citigroup's lending and propel earnings growth. Crucially, improving credit quality means that earnings won't be consumed by bad-debt charges.
CITIGROUP (US: C) | ||||
|---|---|---|---|---|
| ORD PRICE: | $47.91 | MARKET VALUE: | $145.5bn | |
| TOUCH: | $46.81-$48.39 | 12-MONTH HIGH: | $55.28 | LOW: $45.06 |
| FORWARD DIVIDEND YIELD: | 1% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | $68.62 | |||
| Year to 31 Dec | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2011 | 14.7 | 373 | 3 |
| 2012 | 7.8 | 251 | 4 |
| 2013 | 19.5 | 435 | 4 |
| 2014* | 21.9 | 466 | 4 |
| 2015* | 24.3 | 540 | 46 |
| % change | +11 | +16 | +1,050 |
*JPMorgan Cazenove estimates Normal market size: na Matched bargain trading Beta: 1.82 £1=$1.69 | |||
Still, Citigroup's investment banking performance has been subdued and first-quarter revenues there fell 10 per cent. Moreover, Citigroup is more internationally focused than some US banks - just over half of its income is generated in North America, but it also boasts large operations in Asia, Latin America and Europe. Not all of these overseas units are doing so well, however, and first-quarter income at the Latin American unit slumped 22 per cent on the back of credit losses.
Dividend prospects aren't great, either, after Citigroup's capital plan was rejected by US regulators in March - that envisaged boosting the quarterly payout from 1¢ to 5¢, with a $6.4bn share buy-back. The decision was unexpected, given the bank's capital strength, and reflects fears that Citigroup may not be able to adequately predict the impact of adverse conditions (based on stress test scenarios) on its global operations. Still, analysts expect a much improved dividend in 2015.
Compensation relating to the sale of shoddy pre-financial crisis mortgage-backed securities is another worry. Last month Citigroup agreed to pay $1.13bn to investors who bought such securities and, last year, it settled similar claims from the Federal Housing Finance Agency with a $250m payment. But Citigroup will begin discussions this month with the US Justice Department about a settlement that should finally draw a line under this issue. True, that payout could be considerable - the department's starting figure is $20bn - but it's likely to be negotiated down significantly and lenders are, in any case, well prepared for such payouts.
