Citigroup Is Worth $78 Despite Soft Q4 Revenue

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Citigroup (NYSE:C) closed 2018 with weaker-than-expected revenue for the fourth quarter, as an unusually poor performance by the bank’s debt trading business resulted in the bank missing revenue expectations. However, Citi more than made up for the revenue shortfall by sticking to its focused cost-cutting efforts – something that helped it churn out a comfortable earnings beat for the quarter. That said, it should be noted that investor expectations for banks for the fourth quarter were fairly low heading into the earnings season.

We have summarized Citigroup’s Q4 2018 earnings and also detailed the major takeaways from the announcement in our interactive dashboard on Citigroup’s Q4: Key Takeaways And Trends, the key parts of which are captured in the charts below. While the sharp decline in share prices across industries towards the end of 2018 has resulted in a large number of companies looking undervalued, Citigroup stands out in particular because of the fact that its shares are currently trading at roughly 8% below their tangible book value of $63.79. While we have revised our estimate for  Citigroup’s stock downwards from $83 to $78 in view of the expected headwinds to consumer banking and securities trading activities in the near future, our new price estimate is still more than 30% higher than the current stock price.

See our full analysis of Citigroup

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Securities Trading Revenues Slumped To Lowest Level In Four Years

The fourth quarter of the year is seasonally the slowest period for investment banking activities. While this would have weighed on securities trading revenues for the period, overall capital market volatility was also noticeably low over the first two months of Q4. Although volatility spiked in mid-December, the ensuing sell-off resulted in a sharp decline in valuation across asset classes. This resulted in Citigroup’s FICC trading revenues falling to below $2 billion for the first time in a quarter since Q4 2014. While Citigroup’s equity trading desk reported a sizable improvement in revenues year-on-year, the bank’s top line still took a sizable hit as equities trading accounts for just 20% of its total trading revenues.

Total securities trading revenues for Q4 2018 were just $2.6 billion in Q4 2018. This compares to a figure of almost $4 billion in Q3 2018 and $3 billion in Q4 2018

Strong Consumer Banking Loan Growth

Citigroup reported an increase in its consumer banking loan portfolio from around $310 billion in Q4 2017 as well as Q3 2018, to more than than $315 billion by the end of Q4 2018. The strong growth was primarily driven by the seasonally strong increase in card lending, which helped total card loans reach almost $170 billion for the quarter. In fact, Citigroup’s card business reported revenues in excess of $5 billion for the first time in four years.

While the bank received a helping hand from the series of rate hikes by the Fed, which helped its net interest margin (NIM) figure improve to 2.71% from 2.63% a year ago, its total interest-earning asset base has also grown steadily over recent quarters. This helped the net interest income figure reach $11.9 billion in Q4 2018 from $11.2 billion in Q4 2017.

Cost Focus Continues To Add Substantial Value

Citigroup’s continued focus on keeping costs in check helps operating costs fall below $10 billion for the first time since at least 2005. This helped Citigroup’s efficiency ratio improve from 58.4% a year ago to 57.8% in Q4 2018 despite lower revenues – driving the bank’s earnings beat for the quarter.

We forecast Citigroup to report EPS of $7.43 for full-year 2019. Taken together with our estimated forward P/E ratio of 10.5 for the bank, this works out to a price estimate of $78 for Citigroup’s shares, which is more than 30% ahead of the current market price.

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