Why Are Citigroup’s Shares Still Trading At A Discount To Book Value?

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Nearly a decade after the economic downturn, the share prices of most U.S. banking giants have completely recovered from the sharp declines they witnessed in the aftermath. In fact, the rally in bank shares since the U.S. presidential election results has taken the share prices of many banks to all-time highs. However, Citigroup stands out as the only major U.S. bank yet to trade above its book value since 2008. In sharp contrast, the largest U.S. regional bank (U.S. Bancorp) currently trades at a P/B ratio in excess of 200%, followed by a figure of ~150% for Wells Fargo. Notably, Bank of America’s shares have also been trading around their book value over recent months, despite the bank being burdened the most by legacy mortgage issues as well as the resulting legal fallout.

The table below captures the current P/B ratio for the seven largest U.S. banks. The book value shown is as reported by individual banks at the end of Q1 2017.

AB_QA_PB_170525

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The P/B ratio compares the share price with the bank’s underlying financial condition (captured by the book value per share), and can indicate whether the shares are being priced too cautiously or too aggressively. Marked differences between the price of a company’s shares compared to its book value are often a sign of under- or over-valuation. At times, however, very low P/B ratios may actually be because of problems with the company’s business model, whereas high P/B ratios could be due to optimism about the future potential of a company’s business model.

AB_QA_PBChange_17Q1

The table above summarizes the change in P/B ratio for these banks over the last five quarters, with the color gradation along a row added to help understand the overall trend for a particular bank. The sharp decline in bank share prices over Q1-Q2 2016 was due to lukewarm global economic conditions which culminated with an unexpected Brexit vote. But the prices have recovered considerably since then in view of a strong economic outlook.

The shares of U.S. Bancorp and Wells Fargo have traded at a sizable premium to book value since the economic downturn of 2008 – indicating that investors believe in the business models and growth opportunities for these banks in the long run. Similarly, P/B ratio figures of around 110-130% for JPMorgan, Goldman Sachs and Morgan Stanley point to a favorable investor outlook for these banks. Bank of America reported the lowest P/B value among major U.S. banks over 2010-14, but investor sentiment has improved considerably over recent years, with the bank working through its massive legal backlog while also cleaning up its balance sheet. The Fed’s rate hike schedule helped the bank’s shares cross their book value in February, and they have stayed largely around that level since then.

In light of the strong performance of its peers, Citigroup’s P/B ratio looks underwhelming at 80%. Citigroup has done well to dispose of its non-core assets housed under Citi Holdings over the years – with the bank no longer reporting the division separately. So investor concerns about the quality of assets on Citigroup’s books is unlikely to be the reason for the low P/B figure. In our opinion, there are two distinct reasons why Citigroup’s shares haven’t yet reached their book value:

  1. Citigroup’s geographically diversified business model is likely to gain less from the Fed’s ongoing rate hike process than its more U.S.-focused peers. Additionally, the geographical diversification results in an additional layer of risk to Citigroup’s total value, and the strengthening U.S. dollar also presents headwinds to Citigroup’s results.
  2. Despite Citigroup’s decision to hike quarterly dividends from 5 cents a share to 16 cents a share over Q3 2016 – Q2 2017, Citigroup’s dividend yield is the lowest among these banks. Citigroup’s poor track record at the Fed’s annual stress test would likely result in a conservative capital return plan for the period 2017-18 as well – something that weighs on the stock’s valuation.

We represent dividend payouts and share repurchases in our analysis of Citigroup in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how an increase in Citigroup’s adjusted payout ratio affects its share value by making changes here.

See Trefis analysis for U.S. Bancorp | Wells Fargo | Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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