Citigroup Yields 4.91% And Trades At A -55.92% Discount To Book (NYSE:C)

Forget about it not being a good year for shares of Citigroup (NYSE:C). It hasn’t been a good decade. Shares of Citigroup have endured a lost decade of shareholder value, watching their share value ultimately decline by -15.76% to $43.14 after reaching $80 on 3 occasions. Banks aren’t typically exciting investments, but Citigroup continues to look interesting. After their recent quarterly results, I continue to believe that Citigroup is a broken stock rather than a broken company. Going through the financials, Citigroup has a strong loan-to-deposit ratio, has repurchased a large number of shares, and is consistently generating over $10 billion in profits. Citigroup is hovering around a critical support level of $40, and I think shares are drastically undervalued as they trade at a -55.92 % discount to book value and yield 4.91%.

Mr. Market is deeply discounting shares of Citigroup

The banking industry hasn’t been an exciting place for investors to park capital in recent times. The regional banking crisis enhanced concerns, and the rising rate environment has placed an emphasis on maturing debt over the next several years. In addition to operational concerns, the U.S. Treasury, the Federal Reserve System, and the Federal Deposit Insurance Corp. are proposing that banks with over $100 billion in assets should be required to issue long-term debt as a way to ease winding down when a bank fails in addition to lowering the cost to the FDIC insurance fund. If this proposal goes into effect, it could have a negative impact on EPS for these banks in the 0.05% – 3.5% range. In July, credit card delinquencies climbed 14 basis points to 2.67% on average for 8 of the largest lenders, including Capital One, American Express, JPMorgan, Synchrony, Discover, Citigroup, and Bank of America. Citigroup’s Citibank Credit Card Master Trust I recently posted a delinquency rate of 1.21% in July, up 0.04% month over month (MoM) while its charge-off rate declined to 1.65% from 1.76%.

On Citigroup’s balance sheet, they currently have $209.42 billion in total equity, $97.87 book value, and $85.34 in tangible book value. Mr. Market has provided Citigroup with a $42.37 share price and a market cap of roughly $81.95 billion. Shares of Citigroup are severely discounted compared to the underlying value on its balance sheet. While the banking landscape is difficult, and the rising rate environment may lead to increased defaults, the difference between where Citigroup is trading and the actual value on the balance sheet is drastic. Citigroup’s total equity is discounted by -60.87%, and its book value is discounted by -56.71%. No matter what the narrative is, Citigroup is well capitalized with a 119% liquidity coverage ratio, and after available-for-sale and held-to-maturity securities are factored in, their tangible book value has been north of $80 for several quarters.

Putting the declining share price aside, Citigroup continues to be widely profitable and return capital to shareholders through buybacks and dividends

I am looking at Citigroup a bit differently than others. I don’t believe the banking sector will ever become a winner-take-all scenario, as JPMorgan Chase (JPM) isn’t going to be the last bank standing. Depending on what occurs over the next 12-24 months, we could certainly see consolidation in the banking industry if the keys are handed back to the banks on commercial real estate properties, and the banks aren’t liquid enough to absorb these occurrences. We have already seen the start of what some feel is an inevitability as Unibail-Rodamco-Westfield (OTCPK:UNBLF) and Brookfield Properties were preparing to hand over control of the Westfield San Francisco Centre in downtown San Francisco. The property’s ownership ceased making payments on a $588-million loan on this 1.2 million square foot shopping center in downtown San Francisco. When companies like Brookfield Properties are handing back the keys, it fuels speculation on what could be an ongoing occurrence.

Citigroup is in an interesting position as they are well capitalized and profitable. If there is a situation where consolidation in the sector does occur, Citigroup is in a position of strength, not weakness. In the trailing twelve months (ttm) Citigroup has generated $70.8 billion in revenue with a bottom-line net income of $13.51 billion. In Q2, Citigroup generated $17.68 billion in revenue and $2.92 billion in net income. In Q2, we saw their net loans increase by $8.29 billion, which is important because this is the finalized number after the allowance for loan losses. Given the higher rate environment, these loans should provide higher income rates to Citigroup in the coming years because they’re being written at higher interest rates.

Management has placed Citigroup in a position where it can grow its business while returning capital to shareholders. Over the past decade, Citigroup has repurchased 36.58% of the outstanding shares as they have purchased over 1.1 billion on the open market. In the last decade, Citigroup’s share value has declined by over -20%, yet they have deployed enough capital to repurchase more than 1/3rd of the company. In addition to the buybacks, Citigroup has gone from paying an annualized dividend of $0.04 to $2.12 per share. Citigroup recently increased the quarterly dividend from $0.51 to $0.53 after 16 consecutive quarters at $0.51. In Q2, Citigroup repurchased $1 billion worth of shares and increased the dividend. I plan on adding to my position in Citigroup as management stated that they are committed to returning capital to shareholders in the future through more buybacks and dividend increases.

I compared Citigroup to its peers, and based on the different metrics I look at, Citigroup looks undervalued

There are six main categories I look at when assessing banks. From a ratio standpoint, I look at price to earnings, loans to deposits, price to book, and equity to market cap. I also look at the dividend yield and payout ratio for the dividend. I have compared Citigroup to U.S. Bancorp (USB), Bank of America (BAC), Wells Fargo (WFC), and JPMorgan Chase.

Currently, C is trading at the lowest P/E valuation of its peer group. Banks are notorious for trading at lower P/E ratios, so seeing all of the banks in the upper single digits isn’t a surprise to me. I was surprised that Citigroup traded well under the peer group average of 8.55x.

The price-to-book ratio hasn’t made sense regarding Citigroup, and it’s still bizarre. Citigroup trades at 0.44x book value compared to a peer group average of 1.01x. Mr. Market is discounting the book value on Citigroup’s balance sheet by -55.92%. It’s hard to believe that there is that much of a disparity, and shares of Citigroup look unjustifiably undervalued compared to its peers.

Citigroup also has the lowest LDR ratio at 49%. This ratio is critical in assessing a bank’s liquidity. If this metric is too high, the bank may be susceptible to a bank run due to rapid changes in its deposits, meaning it may not have enough funds to cover its requirements. If the ratio is too low, it can indicate that a bank is not meeting its earning potential. Citigroup is generating over $10 billion in net income on an annualized basis, so I am not sure that I would classify it as an underachiever. What I like about this ratio is that Citigroup has been conservative during the banking crisis, and there is more than enough room where, if they make some acquisitions, their LDR ratio should stay well under 1.

Once again, Citigroup is the outlier, with 2.52x the amount of equity on its books than its market cap. While WFC and BAC have more equity than market cap value, it’s nowhere as drastic as Citigroup. Mr. Market is continuing to discount the metrics on Citigroup’s balance sheet.

The last area I look at is the dividend yield. Citigroup is paying a 4.91% dividend, which is the 2nd largest in its peer group and significantly above the peer group average of 3.87%. Citigroup also has a 36.74% payout ratio from its EPS, which leaves a tremendous amount of room for future dividend increases and buybacks.

Conclusion

I could be incorrect, but I am adding to my position as I feel shares of Citigroup are undervalued. Mr. Market continues to discount shares of Citigroup from its book value and equity, which presents an opportunity for long-term investors. Since the pandemic, every time that Citigroup has approached the $40 level, it has found support and rebounded. I don’t think shares will go below $40, especially with its liquidity level. It may take some time for the market to come around, but investors are getting paid almost 5% to wait, and Citigroup plans on allocating more capital toward buybacks in the future. We could see at least a 20-40% move to the upside if the market rebounds in 2024, and I will add shares with Citigroup’s near-decade lows.

Source: seekingalpha.com