Citigroup Will Be A Long-Term Winner

Summary

• Citigroup's stock has significantly underperformed the broader market so far in 2020.
• The bank recently reported Q1 2020 results and, as expected, earnings were under pressure due to the poor economic outlook caused by COVID-19.
• In a broader context, many experts believe that we are already in a recession, which will likely have a negative impact on the bank's stock in the near term.
• I'm long Citigroup, and I have no plans to reduce my overweight position in the near future.

Citigroup's (NYSE:C) stock has significantly underperformed the broader market so far in 2020.

However, it should be noted that Citigroup shareholders are not the only ones that have had to deal with the pain of a falling stock price.

Source: Fidelity

The COVID-19 related concerns, in addition to the deteriorating interest rate environment, have wreaked serious havoc in the financial sector. I believe that the stock market (and C shares) will face further downward pressure in the near term as more companies report on the financial impact of the COVID-19 spread but, in my opinion, Citigroup is well-positioned to weather the storm. Additionally, I believe that the bank's stock at current levels will turn out to be a great long-term buying opportunity.

The Latest

On April 15, 2020, Citigroup reported Q1 2020 results that missed on the bottom-line but that beat the consensus top-line estimate. The bank reported Q1 2020 EPS of $1.05 (missed by $0.31) on revenue of $20.73B (beat by $1.75B), which from an earnings perspective does not compare favorably to the year-ago quarter.

Source: Q1 2020 Earnings Slides

Citigroup continues to be impacted by the low interest rate environment but concerns related to how COVID-19 will potentially impact the economy was the most significant driver for the bank's Q1 2020 earnings (or lack thereof). As a direct result of the concerns, Citigroup had to materially build its reserves to deal with the potential fallout of the virus.

Source: Q1 2020 Earnings Slides

The $4.9B reserve build sounds alarming but let's also remember that all of the 6 large financial institutions - Citigroup, Bank of America (BAC), JPMorgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) - posted total loan loss charges of ~$25.4B in Q1 2020. So, Citigroup is not alone - this is just going to be a headwind that the banks will have to contend with. Moreover, the company's CFO, Mr. Mark Mason, also highlighted during the conference call that the reserve build was larger-than-expected due to the new assumptions from the CECL standard. Any way you slice it, the economic outlook in the near-term is not good but I believe that Citigroup is in a position to weather the storm.

To this point, Citigroup's quarterly results show that the bank is well-capitalized and has the liquidity to deal with the economic shutdown.

Source: Q1 2020 Earnings Slides

The material reserve build in Q1 2020 brings back bad memories from the last crisis but, in my opinion, this is a completely different bank today than it was even a few short years ago. And the large financial institutions are facing a completely different crisis this time around - and it helps that the current administration (and the Federal Reserve) are willing to throw money at the problem in a very big way.

At the end of the day, Citigroup's earnings took a hit from the COVID-19 related concerns but I believe that the long-term thesis is still intact for this global bank.

Digital, Positioning For The Future

A well-known banking analyst, Mike Mayo, recently described what he thought would be a key differentiator (and growth driver) for the large banks, digital. Mr. Mayo believes the big banks will be long-term winners as the structural changes in the banking sector continue to accelerate in the digital space. Mr. Mayo's point, customers will continue to opt for digital banking and the big banks are already well-positioned for the change given the investments in infrastructure that have been made over the last decade. Mr. Mayo highlighted Citigroup as one of the winners.

It also helps the bull case that Citigroup reported strong digital metrics for the most recent quarter.

Source: Q1 2020 Earnings Slides

This bank continues to show mass adoption for its digital offerings and management appears to be laser focused on enhancing the bank's digital capabilities. This, in part, will help Citigroup position itself for the future.

Valuation

Citigroup's stock is attractively valued based on the bank's own historical metrics.

Moreover, the bank's stock is trading at a steep discount when compared to its peers on two key metrics.

Citigroup does not deserve to trade in line with the likes of Bank of America or JPMorgan but, in my opinion, a lot of the risk is already baked into the stock price. Investors should not expect for Citigroup to be a catch-up trade in 2020 but I do believe that C shares are attractively valued if you are willing (and able) to look out 2-to-3 years.

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes Citigroup. I believe that the regulatory environment is actually improving, but this could change in short order.

The Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the banking sector. The COVID-19 related impacts should be closely monitored in the months ahead. If the economy is "shut down" for longer than anticipated, Citigroup's stock will likely continue its downward trend.

Lastly, the CEOs of the big banks (including Citigroup) have been pretty adamant about the ability of the financial institutions to ride out the storm without the need to cut their dividends. I agree with this thought process but, in my opinion, Citigroup's stock would face significant downward pressure if the bank were to cut its dividend.

Bottom Line

Citigroup is positioned to weather the COVID-19 related storms and the bank's stock will likely perform well during the recovery (that is, when it comes). Citigroup's Q1 2020 operating results were not great by any means but I believe that the bank is properly positioned to handle the recession that we are likely already in. As such, I think that it would be wise for investors to stay the course during this period of uncertainty.

Citigroup's stock has the potential to be a market beater over the next few years, so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Analyst’s Disclosure: I am/we are long C, BAC. 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.