We saw bank stock prices increase in value last week on the day when gross domestic product (GDP) numbers were shown to be strong for the second quarter versus expectations. Because GDP numbers came out to be larger than expected, it probably meant that interest rates were going to follow suit, and that's why I believe bank stocks rallied at the time. The bank stock I'm looking at in particular to benefit from this situation the most would be Citibank (NYSE:C). I believe Citi should be the bank to benefit the most from this situation, because it is extremely undervalued based on 2015 earnings estimates and tangible book value.
The company continues to become leaner by shedding non-core assets, most recently agreeing to sell an 80% stake in its $1.5 billion limited partnership in Metalmark Capital Partners to Lexington Partners. The deal is expected to close in the fourth quarter this year. Metalmark is a private equity firm which has a knack for investing in the energy, healthcare, and industrial sectors through partnerships with companies and management teams. This deal should bode well for investors in Citi, as it should add a little bit more cash to the balance sheet in a step towards increasing the dividend next year.
Also, in the department of "cutting the cord," Citi announced it was going to cut its exposure to Russia from $9.4 billion to $8.9 billion. But in other foreign country news, the company estimates that it can lose up to $80 million on any Argentinean downgrade. Citi has a huge international presence, with branch locations in 36 countries, so it is part of the risk profile of the company when sanctions are levied on certain countries or when a certain country's debt is downgraded, and investors should be able to tolerate such nuisances if they want to invest in the company. We've all heard the phrase, "no pain, no gain." You have to be able to tolerate some pain in order to make money in the stock.
The company was also cleared of any action levied against it, as the SEC recently ended its investigation against the company for its part in mortgage-backed securities. In other courtroom news, the company's settlement was allowed, to not be forced to admit to any wrongdoing in the sale of the mortgage-backed securities back in 2007. Though a penalty isn't going to be levied against the company for mortgage-backed securities, it doesn't preclude the company from the $7 billion settlement with the Department of Justice for previous mortgages.
In my most recent analysis of the bank, I stated "I like the stock but I feel the bullish momentum will subside due to the current geopolitical issues going on right now and will not be buying right now." My gut instinct was correct, because the stock has dropped 2.2% as the S&P 500 has dropped 1.68%.
Since that day, we've had tensions in the Russia/Ukraine debacle begin to increase, which have led investors to a flight to safety. That flight to safety is obviously US Treasuries; and with a flight to safety, yields begin to decrease. With decreasing yields, banks can't make as much money. It's just a simple direct relationship between yields and bank stock prices. We've all heard that rates should be going up shortly, so it's just a matter of time that Citi's stock price goes up with it.
To add insult to injury, Bank of America (NYSE:BAC) announced yesterday that it was going to increase its quarterly dividend from $0.01 to $0.05 per share (a 400% increase!); leaving Citi as the only major money center bank to not be able to increase its dividend since the financial crisis. I still believe that Citi will get its day in the sunlight, but I think it's going to be in 2015. I'm going to continue buying the stock, but I'm going to pick my spots.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: The author is long C, BAC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.