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Inflation Is Bad For Banks But It Doesn't Mean You Should Ignore Citigroup

Mar. 02, 2021 9:55 AM ETCitigroup Inc. (C)BAC, JPM, PYPL, SQ, WFC19 Comments
Khen Elazar profile picture
Khen Elazar


  • Inflation is probably coming at least for the short term.
  • Banks usually suffer during high inflation.
  • Citigroup is cheap, offers margin of safety and low payout ratio, and can be a good pick in the sector.


As a dividend growth investor, I am always looking for dividend growth stocks that can fit into my strategy. The fear of another financial meltdown during the pandemic sent stocks in the financial sector spiraling downward, and as of right now we see that the companies are not suffering from significant losses, the recovery will take time, and fiscal stimulation is crucial.

Banks are stronger than ever, today when it comes to their balance sheet. Therefore, they survived the covid recession so far. The Federal Reserve has allowed them to continue buybacks, and dividends are likely to grow again in 2021. In my opinion, the most interesting uncertainty for banks right now is inflation, and I believe that the bank that will be the most attractive during a high inflation environment is Citigroup (NYSE:C).

Inflation is a challenge for banks. Banks make money by selling loans, and if inflation is high then real interest might be extremely low, and even negative thus hurting earnings growth. Therefore, I believe that during inflation, investors should focus on the banks that currently offer a wide margin of safety, and among the largest banks in the nation, Citi is my choice.

According to Seeking Alpha company overview, Citigroup provides various financial products and services to consumers, corporations, governments, and institutions in North America, Latin America, Asia, Europe, the Middle East, and Africa. The company operates in two segments, Global Consumer Banking and Institutional Clients Group.

Citigroup - Wikipedia

(Source: Wikiepdia.org)

Inflation is coming

We start seeing lately more and more signs that the inflation rate is going to rise in the coming year. The Personal Consumption Expenditures Price Index is slowly ticking upward, and it starts to look like the inflation rate will reach an inflation rate higher than 2%, which is the target of the Federal Reserve. This is

This article was written by

Khen Elazar profile picture

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

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Comments (19)

IqbNaf profile picture
Inflation is good for the banks and companies, except for retired people. The companies make large profit in inventory gains and the same very companies need more loans to meet their higher costs. Here the banks come in. Further interest rates also go up giving more spreads to the banks
If the Biden admin increases corp taxes , Citibank's tax benefits are worth more- will add to tangible book value and make share buyback all the more accretive!!
Thank you for the great article.
Good article, thanks. But if banks are going to suffer soon as inflation is going up, why wouldn’t you advise to sell all banks shares, including Citi?
Rex Rode profile picture
The reasons you detail in this article are the reasons I was buying Citigroup in the mid to low 40's in October. I hope you bought then as well. Now it's up 50% with people now chasing the next (last) 30-40%.
02 Mar. 2021
I would argue that a lack of inflation is worse for banks than inflation
Not sure of its future growth potential. Citi has major plumbing problems. I doubt Jane will get the big job done because she is missing Tarzan and Cheetah.
Khen Elazar profile picture
@Stowe1959 I think she will. She's very talented.
jeffkad profile picture
@Stowe1959 I believe that was either a sexist or animalistic comment, and I protest 🙂
@Khen Elazar while she (Jane the Scot CEO) may be smart, is she talented enough to change a global closet full of slow performers, fast enough. While I would like C to improve, it may not...thus shrink it, shrink it, rebuild fast with wealth management. Her cost-cutting may be good, yet is her revenue-building strategies and risk-compliance good?
ReturnOnEquity profile picture
You are 5 months too late in cheering for $C. The time to pick it up was in Oct when C was trading between 40-45. We picked it up at 45$
Khen Elazar profile picture
@Platinum Capital Investor Thank you for reading and commenting. I still think C is attractive compared to its peers.
ReturnOnEquity profile picture
@Khen Elazar Not so sure about that. The price is rapidly approaching book value with no margin of safety. One more revlon incident and you will experience loss if you pay current price.
Rex Rode profile picture
@Platinum Capital Investor I was right there with you. I even bought shares at $41!!!! Sold most at $67 about 6 weeks ago. Bought back at $59 and sold recently at $68 again! Looking for another pullback! Hoping to see $62. Since Oct. a 65% return. I think C might get to $80 in 2021 but not much more. Frankly, I think GM is the big play of 2021. A 12 mo. upside of 50-100%.
Which one is correct then:

- Historical Interest Rates: drive.google.com/...
- Historical Inflation Rates: drive.google.com/...

When inflation and interest rates were rising from extremely low levels post WW-II; the economy BOOMED and Dow Jones rallied 970% from 1942 bottom to 1965 top = 23 years.

When inflation and interest rates became 'extreme' in the late 60s to 1980s the economy faltered and Dow Jones suffered a Lost Decade in 1965 to 1974 = 9 years.

When inflation and interest rates moderated in late 80s to 1990s the economy BOOMED again and Dow Jones rallied from 1974 bottom to 2000 high with 1,930% gains.


Interest rates and inflation kept going down from 1982 apexes toward extremely low levels in the 2000s with deflationary inflation rates. So that so the major Credit Crunch of early 2008 that resulted into Bear Sterns and Lehman Bros. bankruptcies snowballed into Deflation Recession in late 2008 to early 2009 more popularly called the Great Recession.

- the Deflation Recession of 2008/09 resulted into banks ...
- going down under with XLF losing 85% of value.


- now that interest rate is rising with possible inflation to follow ...
- banks are going under again and XLF must again collapse.

Que sera sera, deflation or inflation banks are going under?
Mark BM profile picture
@aarc oh que será. que será.......
Khen Elazar profile picture
@aarc Most data shows that banks suffer from inflation in developed countries.

Great question but the Valuation Metrics at the start of each would be great information to add to this.
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