Large banking institutions don't typically create a lot of excitement among investors. After the near collapse of our financial system in 2008 and 2009, who could blame investors who decide to pass on companies in the financial sector? However, the financial industry appears to have turned around, and Citigroup (C) appears to be headed to higher ground, even after setting 2 year highs. Below are 5 reasons why investors should consider adding Citigroup to their portfolio.
Reason 1: Fundamentals
Citigroup released its first-quarter earnings report on April 15, 2013. The results were extremely impressive and showed that the company continues to make the right decisions. During the first quarter, Citigroup generated $20.5 billion in revenue, up just over $1 billion from the same quarter a year ago. The company's net income came in at $3.8 billion, up from just $2.9 billion for the same period in 2012. The company's performance ratios were also strong, especially ROE. For the first quarter, Citigroup generated an ROE of 8.2% compared to just 6.% for Q1 2012.
Citigroup also did a commendable job of maintaining its capital ratios, which are taking on greater importance since the near financial collapse of 2008 and 2009. The first quarter's Tier 1 Common ratio was 11.8% and the Tier 1 Capital ratio was 13.1%. Both were lower than the prior quarter, but still well above industry recommended standards.
There were some key takeaways from the earnings report that I would like to point out:
- Citigroup demonstrated sustained momentum in investment banking. This division generated first revenues of $1.06 billion, compared to just $872 million in the first quarter a year ago. That is a 22% increase, quarter over quarter.
- Citigroup shows continued growth in Citicorp loans and deposits.
- It also exhibited a strong capital position at 9.3% estimated Basel III Tier 1 Common Ratio.
The company was able to accomplish these feats by focusing on execution and achieving financial targets. One impressive note is that the company continues to reduce the amount of mortgage delinquencies, as the graph below shows.
Reason 2: Strong Industry
While Citigroup has had a heck of a year, its closest competitors have also seen strength. And when an industry is showing overall strength and the company we're looking at is exceeding that strength, it warrants special attention. Let's look at JPMorgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS), and Bank of America (BAC).
JPMorgan has returned approximately 21% over the past 52 weeks.
Wells Fargo has returned approximately 15% over the past 52 weeks.
Goldman Sachs has returned approximately 46% over the past 52 weeks.
And lastly, Bank of America has returned approximately 68% over the past 52 weeks.
So clearly the banking industry has been on fire, especially when compared to the broader market. We can measure the broader market's performance by looking at the S&P Depository Receipts (SPY). These Receipts have only returned approximately 20% over the past year, which is a solid return, but not nearly as exciting as some of these bank stocks. As we will see, while the industry has been strong, Citigroup has been even stronger.
It goes without saying that all of the investors in these companies are jumping for joy with the results these companies have produced. These impressive performances can be attributed, mostly, to the recovery of the housing market. The housing market has shown significant improvements in housing prices, new home building, and housing sales. Because of these improvements, banks have benefited from the amount of new mortgage originations. Late last year, Bank of America was able to generate mortgage originations of $22.5 billion. Wells Fargo was the largest originator with $125 billion.
Reason 3: Technical
As I mentioned in the opening paragraph, Citigroup has recently soared to two-year highs. As the chart below shows, Citigroup has had an unbelievable past 52 weeks.
During the past year, Citigroup has returned approximately 58%. This is second only to Bank of America, which has returned over 65%. As we will see below, this is quite an impressive performance for an industry that has been one of the market's strongest performers.
Reason 4: Best Buy Card Acquisition
Towards the middle of February, Citigroup struck a deal with Capital One Financial (COF) to acquire a portfolio of Best Buy (BBY) private label and co-branded credit card accounts. The deal was to acquire $7 billion worth of the cards at book value.
This acquisition will allow Citigroup to continue growing its retail services business after having gotten rid of most of it after the near financial collapse several years ago. The business unit provides consumer and commercial credit card products, services, and retail solutions to some of the country's largest stores. This acquisition will add to the 90 million accounts that Citi's division already has.
Reason 5: Major Hedge Fund Discloses Ownership In Citigroup
Jamie Dinan is the hedge fund manager over at York Capital Management. York Capital revealed that it increased its Citi holdings to a total of 2.7 million shares at the end of 2012. A number of other hedge funds also added to their Citi holdings during the fourth quarter of last year, which shows the professional crowd may finally be warming up to Citi and the direction it appears to be headed.
It appears that Citigroup is making all the right moves. The stock has appreciated nearly 60% over the past 52 weeks on the back of strong earnings, strategic acquisitions, and doing enough to persuade professional funds to invest. Combine these moves with the fact that the industry is showing broad strength because of a housing recovery, and it appears that Citi is poised for even more growth.