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Summary

  • Hard hit by the subprime mortgage meltdown and the financial crisis, Citigroup stock has declined nearly 90% over the past five years.
  • The company needs better quality controls to mitigate damage similar to the fraud that happened at Banamex a couple of months ago.
  • The Justice Department is seeking more than $10 billion in fines from the company in connection to the government's investigation into the bank's sale of mortgage-backed bonds.
  • Citigroup does not excel on certain financial measures relative to its competitors, Citigroup completed repurchase of common stock for 2014, but expect more debt reduction with the excess cash.

Hard hit by the subprime mortgage meltdown and the financial crisis, Citigroup (NYSE:C) stock has declined nearly 90% over the past five years. Citigroup has had to face a multitude of unfortunate events of late, resulting in a drop in its erstwhile popularity. Even so, it is still considered among the top ten Bank of America's favorite stocks as predicted for the year 2014. A major reason behind this is the fact that Citigroup's stock is inexpensive. The question, which arises now, is that whether or not Citigroup is actually the cheapest American bank to buy and whether the consequences of investing in it simply because of the fact that its stock is cheap are favorable or adverse. The company needs better quality controls to mitigate damage similar to the fraud that happened at Banamex a couple of months ago. Let's take a look at what the current market scenario tells us.

What is Citigroup's main quality?

There is no denying the fact that the best quality of Citigroup is perhaps its low valuation. In fact, it is the only large-cap bank in the United States that is actually trading below its book value apart from The Bank of America, which had been trading at below one third of its book value in 2011. This has been serving as a major attraction for investors and the attraction further upped when Citigroup's actual EPS exceeded its expected EPS by $0.16. Citibank also reported higher EPS than its direct competitors including JPMorgan Chase (NYSE:JPM). For investors, this is an added advantage; lower value stock that ends up giving comparatively higher returns. The Justice Department is seeking more than $10 billion in fines from the company in connection to the government's investigation into the bank's sale of mortgage-backed bonds

Why has the stock's value been falling?

Citibank is one of two major banks that issue copper and other metal-backed loans. The most recent cause behind the fall of the value of Citigroup's stock has been a shock it received in March when it failed to pass the "stress test" of the Federal Reserve. Citigroup's capital plans were rejected by the Federal Reserve. Citibank is the only bank that has had its capital plan rejected no less than twice out of a total of four times. The company feels a bit too risky right now to keep purchasing batches of the stock. The firm's average daily return of 0.02% from 2011 to the present is too low to justify a three-year beta of 1.93. Although mortgage volume had already been decreasing since hitting six hundred-plus in 2003, 2014 brought a new and exceptional low for mortgage lenders - especially after a steady rise since 2010 to 2013. 2014's first quarter gave banks the worst figures since 2000's $122 billion.

Looking at the overall dismal performance of Citigroup in the realm of mortgage generation, it seems odd that Wells Fargo (NYSE:WFC), the largest mortgage lender in the US, has been reporting increasing earnings since October last year.

How has the stress test affected the dividends?

The consensus analyst price target for Citigroup is $58.68 while the stock currently trades at around $47.

While Citigroup managed to clear the quantitative part of the stress test including capital adequacy etc., it failed to pass other parts of the test including risk planning. With these results, the bank has been prohibited from raising its already moderate dividends. This can further have a direct impact on the value of the stock as lower dividends may result in loss of popularity of its stock among investors. The value of the stock can further fall as a result of this. Developments to improve efficiency, such as lowering compensation expenses and job cuts, may help the bank to lower costs.

But that's not it…

While it may seem like the stress test was the worst news for Citigroup, it was not actually the case. The firm's Mexican unit faced a loss of around $400 million owing to fraud related to loans that were given to a customer. This happened just prior to the stress test report thus making things go from bad to worse for the firm.

Should the stock still be invested in?

The consensus analyst price target for Citigroup is $58.68 while the stock currently trades at around $47. Investing in Citigroup's stock totally depends on the nature of the investors' plans. For investors who are short-term oriented, investing in Citigroup may not seem like a very good idea; after all, things have been going downhill for the firm. However, this does not, in any way, mean that investing in the firm's stock is completely futile. For long-term oriented investors, investing in Citigroup is not that bad an idea. The CEO of Citigroup, Mr. Corbat has assured that work has immediately been started on developing solutions to the bank's risk management problems in all the countries where the bank operates. This means that the future does not look all that bleak for Citigroup and that in the long run, things are expected to improve for Citigroup.

So what can we conclude?

Well, Citigroup has been giving good dividends prior to 2008 and has performed well. Lately, especially due to the stress test failure and the Mexican fraud, the firm has been facing difficulties and the value of its stock has definitely been falling. However, this can be touted as the firm's resolve as well. With lower stock value, if the firm still manages to pay good dividends, the investors won't have to worry about losing out on anything. However, the time span for which an individual wants to invest is crucial; it is preferable for long-term investors to invest in the firm's stocks whereas short-term investors can be advised not to invest in Citigroup's stocks. It is most definitely the cheapest bank to buy in the US at the moment.

Source: Citigroup: The Cheapest U.S. Bank To Buy