Citigroup (NYSE:C) is one of the largest diversified financial services companies in the world. It was hit severely during the financial crisis of 2008 and was one of the largest recipients of the federal bailout package. However, the company has come a long way by pursuing prudent strategies and achieving operational efficiency. Stock price after the crisis was at the lowest point in the last ten years and showed one of the most dramatic and steep falls. However, more recently, the stock price has shown encouraging trends and Citigroup now trades considerably higher than 2009 levels.
Trend in the Net Interest Margin
The net interest margins of all US banks witnessed an extreme low of approximately 3.15% during the crisis. A small recovery was witnessed in 2010 when interest margins reached 3.84% before falling again to 3.37% in 2012. The interest expense of Citigroup maintained its average rate of a little above 1.61% from 2010 up till the third quarter of 2011 before initiating a declining trend towards 1.34% in the fourth quarter of 2012. The decline in average interest revenue started earlier as it deteriorated from 4.76% in the first quarter of 2011 to 4.04% in 2012. Therefore, the net interest margins for Citigroup declined from 3.32% to 2.81% in the second quarter of 2012 before improving to 2.93% in the last quarter of the same year. Citigroup maintained excess liquidity in the periods of declining margins because of a high degree of risk and uncertainty associated with the global economic environment. As the economic conditions started to show signs of improvement, the excess liquidity was decreased through long term debt reductions and increased lending. This resulted in the improvement of net interest margins for Citigroup in the last two quarters of the previous year.
Mortgage Issues Remain
Despite improving financial performance of the company, the mortgage issues have not been laid to rest as yet. In the fourth quarter of 2012, Citigroup incurred $1.3 billion in legal charges - this included the previously announced $305 million charge regarding the settlement of mortgage related charges. Furthermore, the bank incurred $1 billion in charges associated with layoffs and $485 million in debt write down. Citigroup has diverted its attention toward geographical diversification which was evident in the last two quarters. The highest revenues earned from the Global Consumer Banking segment still belong to North America. However, for Securities & Banking and Transaction Services, more revenue is earned from the EMEA region. A substantial increase in revenues from Latin America has also occurred across all segments.
Valuation is Still Attractive
Even after a decent rally in recent months, Citigroup is attractively valued. The stock currently trades at a P/E of 18.02 as compared to the industry average of 35.85, and the PEG ratio of the company is slightly less than one. The asset turnover for Citigroup is highest amongst the three major competitors: JPMorgan (NYSE:JPM), Wells Fargo (NYSE:EFC) and Bank of America (NYSE:BAC). Since 2005, the total deposits of Citigroup have demonstrated a CAGR of 6.7% despite the volatility and uncertainty in the global economic environment and the industry's sensitivity to these conditions. Moreover, the company has obtained the approval from the Federal Reserve for a repurchase of up to $1.2 billion.
These financials, along with the efficiency with which the company has been managed across shaky economic conditions, suggest an improvement in Citigroup's stock performance. However, the performance of Citigroup is subject to some risk factors. The nature of the business makes the company highly sensitive to global conditions, financial shocks and macroeconomic policy variations, specifically with respect to interest rates. Also, the geographical diversification has been redirected mainly toward the EMEA region. Therefore, the performance of Citigroup is also highly sensitive to the debt situation in Europe.
I expect the stock to carry on its upward trend in the long-term U.S. economy has seen some recovery recently and banks have been able to increase deposits and loan portfolios. Furthermore, recovery in the housing sector will also serve as an important positive factor for financial institutions. Citigroup is trading below its tangible book value. In addition, the bank has access to developing economies, which will contribute to its future growth while most of its peers will be fighting the European debt crisis. Moreover, Citigroup is adding high-margin loans to its portfolio, and recently increased capital levels give it a great platform to outperform its peers.