We thought it would be fascinating to pitch Citigroup (NYSE:C) against a major international banking rival to see how it squares up. And they don't come much bigger than U.K.-listed HSBC (NYSE:HSBC)! As well as being in the same GICS sector, the two companies are of a comparable size, with Citigroup's market cap being $151 billion and HSBC's being $206 billion.
Citigroup continues to post profitability numbers that are below what many investors are hoping for. For example, Citigroup's return on equity is just 4.73%, while its return on assets is even lower at just 0.51%. Both of these numbers do not compare favorably to HSBC, with the U.K. based bank having a much higher return on equity of 8.61% and a return on assets that, although slightly disappointing, is still higher than Citigroup's at 0.60%. Operating margins, though, are much better at both banks, with HSBC ahead again on 34.36% versus 23.14% for Citigroup.
The Previous Quarter
Meanwhile, the previous quarter's revenue figures were disappointing for both companies, with the top line seeing falls of 4.8% for Citigroup and 12.5% for HSBC. In terms of the bottom line, Citigroup's reported earnings number was 95.7% down on the prior quarter, although it included a $3.8 billion charge to settle RMBS and CDO-related claims. HSBC also had a tough quarter, with earnings falling by 18%, as it no longer benefited from one-off items that had impacted positively on the prior year's quarter.
A Pickup On The Horizon?
However, Citigroup's tough quarter could soon be forgotten, as the bank is forecast to increase EPS by 50.56% next year. This could transform the bank's profitability numbers and allow it to pay out a far higher proportion of profit than is currently the case (it currently pays out just 1% of profit as a dividend). In turn, this could make Citigroup's yield far more attractive than the current 0.1% on offer, which does not compare favorably to HSBC's yield of 3.9%, which is high partly due to a substantial payout ratio of 82%.
Although we were expecting Citigroup to trade at a slight discount to HSBC after encountering its lower profitability, lower yield and more challenging current performance, we feel that the current difference in valuation between the two banks is too great. For instance, Citigroup's forward P/E is currently 52.4% lower than that of HSBC at 9.3 versus 19.53, while its price to book ratio is 32.4% lower than its U.K. rival at 0.75 versus 1.11.
Furthermore, as a result of its impressive growth prospects, Citigroup's PEG ratio is just 1.26, while HSBC's is considerably higher at 4.36. So, while we feel a small discount to HSBC is justified, we believe the current difference between the two is too wide. As such, we feel that Citigroup could outperform HSBC going forward.
We're encouraged by Citigroup's growth prospects and its low valuation relative to HSBC. Sure, Citigroup struggles to compete with HSBC at present, with its profitability, dividend and quarterly performance being behind its peer. However, current valuations seem unjustly low for Citigroup - especially with its strong forecast growth rate. As a result, we think that Citigroup could outperform HSBC going forward.
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