Citigroup (NYSE:C) may have struck the wrong chord when it announced worse than expected results late last week.  The bank took a $1.3 billion charge for the quarter, well above the $305 million charge investors anticipated following Citi’s statement some days ago.  The additional $1 billion charge comes from an increase in legal reserves as the bank is under review by the Consumer Financial Protection Bureau. Citigroup’s CFO also warned of elevated legal expenses in the near future. But the above does not take away from the strength of the banking group’s globally diversified business model.
Looking at the bigger picture, Citigroup has a lot more to offer to its investors as it continues to work its way through some problems areas, most of which are housed under Citi Holdings, to separate them from the core Citicorp operations. Below, we highlight the main factors behind our sanguine outlook and raised price estimate for Citigroup’s stock from $37 to $46.
Global Banking Business Can Benefit Even Under Low Interest Environments
Citigroup’s biggest strength is undoubtedly its extensive global presence. The bank boasts of operations in 160 countries and jurisdictions across the globe. This diversification gives the banking group a big advantage over its competitors as its interest income does not remain dependent on the interest rate environment prevalent in a single country – specifically the U.S. The bank also has access to funds in the form of low interest rate deposits from all the regions in which it operates.
As a result, the bank can achieve considerable higher net interest margins, compared to competitors like Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB), which predominantly operate in the U.S. Citigroup already demonstrated this for 2012, as the bank consistently reported higher net interest margins each quarter last year, even as other banks struggled to maintain margin levels. This fact is indicated in our updated net interest margin for Citigroup’s consumer banking business shown below.
Improving Credit Quality For Cards Division Presents Significant Upside
Citigroup has also seen a significant improvement in its credit card portfolio over recent quarters, with charge-offs and credit losses consistently declining each quarter. Credit losses on card loans fell from $2.1 billion in Q4 2011 to $1.6 billion in Q4 2012, with non-performing loans (loans for which there have been no payment for more than 30 days) also falling over the period. And this improvement came even as the bank gradually increased the size of outstanding loans, as well as the interest income over the last three quarters.
The improving credit quality will also lead to a lower need for provisions something we capture in the chart below.Notes:
- Citigroup Reports Fourth Quarter 2012 Earnings, Citigroup Press Releases, Jan 17 2013 [↩]
- Citi Statement on Independent Foreclosure Review Agreement in Principle, Citigroup Press Releases, Jan 6 2012 [↩]