Citigroup Stock Is down 49% In 2020, How Low Can It Go?

Despite an almost 49% decline in Citigroup’s stock since the beginning of this year, at the current price of $42 per share, we believe Citigroup has a significant downside. Why is that? Well, Citigroup’s (NYSE:C) revenues would face a significant challenge due to lower commercial and consumer spending, not to mention the higher risk of loan defaults, resulting in lower earnings for the year. Our dashboard How Low Can Citigroup Stock Go provides the key numbers behind our thinking for the drop, and we explain more below.

The point is, a significant contributor to this stock growth over last 2 years was Citigroup’s P/E ratio. Citigroup’s P/E ratio, on a trailing basis, grew from zero (negative earnings) at the end of 2017 to over 9.8x at the end of 2019. While Citigroup’s P/E is down to about 5.0x now, it is higher than the negative P/E multiple at the end of 2017.

So what’s the likely trigger and timing to this downside?

Businesses are not investing, with a shift in focus from long-term to near-term survivability. On the same lines, there is a drop in consumer demand as people are refraining from discretionary expenditures. The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for Citigroup, as it has a substantial loan portfolio of consumer loans and commercial loans. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, the lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees.

However, the bank could profit due to its significant presence in the sales & trading business. The company generated around 28% of its revenues from its sales & trading business in 2019. Given the extreme level of volatility in equity & debt markets over recent weeks, the bank is well-positioned to report strong results for its securities trading arm, which should help mitigate the negative impact of weak economic conditions on its other operating segments.

While recently released Q1 results saw some growth in revenues, we believe that Q2 results in July will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as full-year 2020 guidance. Specifically, we believe the full-year revenue expectations formed by the market at the time of July’s Q2 results may be closer to $63.1 billion – about 11% lower than its 2017 revenue of $71.5 billion and a whopping 15% lower than the 2019 revenue of $74.3 billion. Our dashboard shows key components of Citigroup’s revenues (Base case scenario).

The market will respond to this, and Citigroup’s P/E is likely to be around 6x which is about 40% lower than the 2019 P/E of 9.8x, although it is still higher than the figure in 2017 and close to the current P/E multiple of 5x. Further, margins are expected to drop by 30%, which would mean a 36% drop in earnings, translating into Citigroup’s price drop of over 27%, to about $31 or lower.

A more likely situation is earnings margin also shrinks to about 16%, from the 26% seen in 2019, pointing to another 10% lower in Citigroup’s stock price – even a potential $27 level expectation in May or June 2020.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in the later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Citigroup’s multinational peers, including JPMorgan and Morgan Stanley. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe Citigroup’s stock price at levels of $42 and below provides a buying opportunity for investors willing to be patient.

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