Citigroup Radiates Potential For Long-Term Buying

| About: Citigroup Inc. (C)

Summary

Citigroup released its earnings for the third quarter and the results came out ahead of analyst expectations.

I expect to see the Costco contract bringing in its favorable impacts on Citigroup’s financials some time during the next year.

The move away from the market in Brazil and Argentina seems good to me because it gives Citigroup the opportunity to make its balance sheet leaner.

The banking industry certainly hasn't taken off in investors' books. The Fed's reluctance in interest rates hike haven't really made the banking sector conducive enough in the eyes of many investors to consider buying banking stocks for their portfolio. Banks haven't really been A class performers as prime interest rates increase slowly. But given that these stocks are trading at discounts, this could probably be the best time to enter into a long haul with the bank that seems to be radiating the most potential - in my eyes, Citigroup (NYSE:C)

Ahead in 3rd quarter earnings

Citigroup released its earnings for the third quarter on the 14th of October and it raised a few eyebrows as the results came out ahead of analyst expectations. Revenues for Citigroup came in at $17.8 billion but only 2% higher than estimates by analysts. The highlight of the release was certainly the higher fixed income revenue earnings compared to the third quarter last year - earnings from the bond-trading segment had remained challenging since 2013, but finally reported a 35% increase in the latest round of results.

Their earnings clocked in at $1.24 per share, which is roughly 7% higher than what was expected out of the company. Citigroup's latest books also reflected a noteworthy increase in the book value per share of the company, witnessing an 8% growth over the 3rd quarter of 2015, amounting to $74.51 per share in the latest earnings release.

The group's consumer banking unit noted a 24% decline in their profits. I could attribute this decline to the expense that Citigroup has been incurring as it tries to bring up its consumer business through forming new alliances with clients. One of these alliances was its collaboration with Costco (NASDAQ:COST), which incurred heavy expenses in the consumer conversion process.

I believe that the expenses incurred in this alliance formation was only one off in nature and I expect to see the contract bringing in its favorable impact's on Citigroup's financials some time during the next year. In fact, I am keen on seeing Citigroup adding contracts of a similar nature to revitalize its consumer business, especially in North America.

Citigroup focused on becoming leaner

Earlier during the month, news of Itau Unibanco (NYSE:ITUB) buying Citigroup's consumer business in Brazil circulated in the market. Citigroup also made a sale of its consumer business in Argentina, bringing the chapter of a 100-year business relationship in a country to a close. I see this move to sell off the consumer banking stake in these countries as a favorable one for a number of reasons.

One of the reasons is that the group wasn't really able to penetrate the market as much as it had probably hoped for. For instance, the Brazilian market remains dominated by local banks, which makes it difficult for internationals to compete in such a market. When businesses such as these aren't performing as expected, it's probably best to let them go.

The move away from the market in Brazil and Argentina seems good to me because it gives Citigroup the opportunity to concentrate on their consumer banking operation elsewhere - where they believe that more potential exists in the market, while becoming leaner at the same time. The bank continues with its investment banking division in both countries, reaffirming the fact that the consumer business couldn't be Citigroup's forte in these areas.

While Citigroup seems to be chopping back its businesses in some areas, Mexico seems to be one where Citigroup is increasing its focus. The group plans on rebranding Banamex and subsequently investing $1 billion in the outfit to offer modern banking services. Priority banking will also be an area of focus in this initiative. The move is one that will certainly help it to be competitive in key growth areas.

As the Mexican economy undergoes a transformation, the impacts are likely to trickle down to the banking sector as well. Formal employment, low inflation and more disposable income can allow people to increase their bank deposits and even enter into new banking relationships with financial institutions. The investment in Mexico, in my view, comes at an opportune time for the bank. Citigroup could see the Mexican market contributing significantly to top line growth to the bank's financials in due course of time.

My views

Going by the latest earnings release of Citibank was arguably better than expected, and I'd applaud the company and its management for the progress that they have started to focus on. For instance, I foresee that collaborations such as those with Costco could reflect positively in the company's financials as we can expect organic growth on the back of volumes from such deals. Expectations of the company reaffirm this as Citigroup's executives expect the branded card business to contribute 2.3% to return on assets eventually.

It's true that Citibank continues to face pressure of delivering to shareholders as its return on equity and return on assets slipped compared to last year. But Citigroup seems to be taking several initiatives, which if successful, could pan out nicely for investors in the long run. Some of these initiatives include lowering the share count (56 million were pulled back this quarter) and working on building its book value; steps that I believe are being taken in the right direction. The sales of businesses in some countries, while beefing up investments in others, are a reflection of the bank's commitment to deliver value to their shareholders.

Citigroup's stock is incredibly cheap right now and has been trading below its book value ever since the financial crisis took its toll on the country. I see the low stock prices as a reflection of the low interest rate environment - so as soon as interest rates start picking up, I see the stock delivering to shareholders in terms of better stock values.

So to sum it up, I see Citigroup as a good pick for its focus on improving its balance sheet to make it leaner, for working on its core activities while shedding off excess baggage, for its attractive pricing and its commitment to return value to shareholders. If you are one who would like to take a risk and wait out this period patiently for a good return, I'd say Citigroup could be your pick for a long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.