I am coming up on five years of writing here at Seeking Alpha. One of the earliest names that I first got behind was Citigroup (NYSE:C) in the summer of 2012 at $26.28 per share. It delivered a double since then after I said it looked like a good investment for the next 3-5 years, but the stock has essentially traded sideways around the $50 mark for some time. For all of 2016 until the elections, it felt as if it had stagnated under $50 and appeared that it wanted to go deep into bear territory. Now despite this fact, longer term, I have maintained a hold rating because I am of the opinion that all bank stocks will start to move higher and will benefit from higher interest rates. We have seen the Fed raise rates, but the impacts take time. That said, the first hike was in December of 2015. Has this had an impact in any way?
Well, Q4 earnings were just announced. The bank delivered a top line miss but a bottom line beat against analyst estimates. I will say plainly that this quarter was decent, but my expectations were once again pretty conservative. Revenue was, however, down markedly year-over-year. The strongest banks are seeing revenue increases, regardless of their global nature. This came as a small surprise, though I was looking for a 6-7% decline given shifts in business. Revenue came in at $17 billion and was down 8.7% year-over-year. Now, this was a miss of $290 million compared to estimates. It is important to note that the company did see an increase on the earnings front versus last year's comparable quarter. Adjusted net income was $3.6 billion which translated to $1.14 in earnings per share. This was a beat of $0.02, but was also up versus the $3.3 billion, or $1.06 seen last year. That is a win.
Of course, the headline numbers are important, but we need to realize why numbers were down. Revenues were down from currency issues, and another drop in Citi Holdings. Citicorp revenues were up. It is key to note that this is the last time Citi Holdings will be reported on its own. After years and years of my coverage on the name, Citi Holdings has been sold off to now comprise less than 3% of the balance sheet. Earnings per share spiked due to controlled expenses as well as share repurchases. It is key to realize that there were far lower legal expenses than in years past as well. As a whole, the company has consistently reduced expenditures They were down 10% year-over-year and even down from the sequential quarter. They came in at $10.1 billion. Clearly, the company is moving in the right direction for this important metric. Of course, when looking at revenues and expenses, we should look to the efficiency ratio. Well, I will tell you that the biggest piece of positive news out of this quarter was the improved efficiency ratio. The company is spending wisely as it has an efficiency ratio that is among the best-of-the-best. It remains under 60% and boasts one of the best ratios of the large banks that I have covered. The ideal is 50%, with strong banks around 60%. This critical metric came in at 58% on the year.
What about loans and deposits? Well, Citigroup's loans were $628 billion in total to end Q4 2016. This is up 1% year-over-year, and up 3% currency adjusted. Total average deposits rose year-over-year. Total average deposits were $929 billion to end Q4 2016. This is up 4% in constant dollars over last year. But you should be aware that Citicorp deposits jumped by 5% overall, but the continued reduction in Citi Holdings held back deposit growth. As you can see, Citi Holdings is still weighing on the company, but this divestment is nearly done. And so I think investors need to really be focused on the growth from Citicorp as the company moves out of Citi Holdings.
As I have said several times in the past, Citi Holdings is to blame for a chunk of weakness, but overall this was still a decent quarter despite the low expectations. Of course, this can no longer be blamed for weakness as the company moves away from reporting these holdings. The stock rallied from November on. I felt under $50 a share the stock was attractive long-term, but at $58 this is a solid hold. The P/E ratio is a reasonable 12.6, which is well below the sector average of 13-14 times current earnings. Further, the dividend, while low, could be raised into the future to put the bank on par with its competitors.
Even in this low rate environment the company continues to deliver against expectations, but now rates are on their way up and that stands to benefit the entire sector. While I believe there are stronger competitors, a rising tide will lift all boats. Investing is about performance relative to the expectations set. Expectations are set to become larger, and so Citigroup will need to deliver, but the Street has bid up the share prices on these expectations for the future. I like that book value is improving, and the discount to tangible book is attractive. I can't imagine what earnings will look like when the company can start making loans at a higher rate and widening its margins. I continue to rate the name a hold.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
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.