Citigroup: Assessing Q3 Performance

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About: Citigroup Inc. (C)
by: Income Generator
Summary

Stock markets continue to trade under heavy bearish pressure.

But earnings results from the financial sector have set a positive tone for the broader economy, and Citigroup shares look undervalued relative to industry peers.

Citigroup’s Q3 performances suggest strength in operational efficiency and managerial approach.

Income investors can capture the stock’s attractive 2.60% dividend yield while market bearishness continues to influence broader valuations.

Citigroup has a payout ratio of only 27.3%, which suggests the dividend is stable and likely to see continued increases in the quarters ahead.

Stock markets as a whole have traded under heavy bearish pressure in recent sessions, and shareholders of Citigroup (C) have found themselves on the list of casualties. The stock is trading lower by 6.32% on a year-to-date basis. This activity is somewhat perplexing, as it does not entirely reflect the underlying strength present in Citigroup’s most recent quarterly earnings report. But the stock’s elevated 2.60% dividend yield provides an attractive opportunity for income investors looking to capitalize from a rebound in share valuations once the bearish volatility in the broader market comes to an end.

(Source: YCharts)

In terms of valuation within the sector, Citigroup continues to trade near the lower end of the spectrum. For most of the last year, stock moves have placed C in last place amongst the four major U.S. banks.

But if you are an income-oriented investor looking for value in building exposure to the sector, this places C in an excellent position for upside reversals once bearishness in the broader market begins to ease. Ultimately, Citigroup’s performances during the most recent reporting period help validate this outlook, and the rising dividend yield remains attractive from the longer-term perspective.

(Source: Citigroup Earnings Presentation)

For the third quarter, Citigroup beat analyst estimates with earnings of $1.73 per share (against expectations of $1.69 per share). Citigroup’s revenue figures, however, were slightly below expectations at $18.389 billion (versus the consensus estimates of $18.501 billion).

Clear positives were generated by Citigroup’s lower corporate tax rates during the quarter (which dropped from 31% last year to 24% during the most recent reporting period). The net impact here generated significant profit growth of 21.8%, relative to the third quarter of 2017.

(Source: Citigroup Earnings Presentation)

One of my preferred metrics in determining a bank’s ability to generate profits is the net interest margin figure, as it tends to provide confirmation of operational efficiency and managerial direction. For the third quarter, Citigroup showed steady improvement to 2.7% (which matches the highest levels of the year). The total sales posted at $18.389 billion, which is largely relative to the prior year.

But further strength for the period can be found in Citigroup’s 4% increase in deposits (at $1.005 trillion) and the 3% gain in the total loan figure (at $675 billion). So, while total revenue figure for the period was something of a disappointment, the growth in these areas, combined with widespread cost cuts, helped ensure better-than-expected profitability for the quarter.

(Source: Citigroup Earnings Presentation)

On the downside, sales from institutional clients dropped by 2% (to $9.2 billion). These results were negatively impacted by a 5% drop in markets and securities revenue. The revenue figure from the investment banking segment was another weak point, showing a fall of 16% (to $1.18 billion).

These are all factors which contributed to the miss in Citigroup’s total revenue number for the quarter. But those negatives were partially offset by a 9% gain in sales from fixed income trading (at $3.2 billion). For long investors, this will be a key area to watch going forward, as the trading segments have the potential to become a significant revenue driver during certain types of market conditions.

This was the case during the early portions of this year, and the rising stock market volatility we have seen recently might be creating a similar type of effect on the market right now. The financial sector is often the primary beneficiary of this type of market behavior, and this bodes well for Citigroup’s results for the fourth quarter.

(Source: Author)

Overall, we can see that the positives outweigh the negatives for Citigroup during the third quarter. Clear weakness was visible in the revenue disappointment, but the bank managed to make the expense adjustments which were needed to produce growth in net income and beat the market’s consensus estimates.

Citigroup’s operational efficiency has shown steady improvement over the last several quarters, and the bank should continue to benefit from rising trading volumes and rising interest rates as we move into the next reporting period.

(Source: Seeking Alpha)

Rising volatility throughout the market seems to be having a divided impact on C share valuations. Bearish pressure seems to be weighing on the stock while simultaneously creating an environment in which the bank can boost its trading revenues in the quarters ahead. With a $1.80 annualized payout, the stock’s elevated 2.60% dividend yield should offer some respite while the current declines run their course. But most of the evidence suggests C is a buy at current levels, and income investors should be encouraged by the stock’s low 27.3% payout ratio.

Ultimately, this suggests the dividend is stable and likely to see continued increases in the quarters ahead. Citigroup’s third quarter performances showing improvements in operational efficiency and managerial approach support this outlook, and the latest declines in share prices should be viewed as a buying opportunity in the stock.

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Disclosure: I am/we are long C. 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.