Citigroup Stock Is Trading Below Its Intrinsic Value

Citigroup’s stock (NYSE: C) has lost 9% YTD, as compared to the 14% rise in the S&P500 over the same period. Further, the stock is currently trading at $41 per share, which is 26% below its fair value of $56 – Trefis’ estimate for Citigroup’s valuation. 

Interestingly, Citigroup stock had a Sharpe Ratio of almost zero since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The bank surpassed the street expectations in the second quarter of 2023, despite a 1% drop in net revenues to $19.44 billion. It was primarily due to a 28% decrease in the noninterest revenues, offsetting a 16% gain in the net interest income (NII). The noninterest revenues were mainly down due to a 31% decline in the investment banking fees and a 43% fall in the principal transactions income. However, the NII benefited from loan growth and higher interest rates. On the cost front, the provisions for credit losses increased from $1.3 billion to $1.8 billion. Further, the operating expenses as a % of revenues witnessed an unfavorable rise. Overall, the adjusted net income decreased 36% y-o-y to $2.9 billion in the quarter.

The bank’s top line grew 5% y-o-y to $40.9 billion in the first half of FY 2023. It was driven by a 19% rise in the net interest income, partly offset by a 15% decline in the noninterest revenues. That said, the provisions figure rose by 87% y-o-y to $3.8 billion over the same period. It led to an adjusted net income of $7.5 billion – down 15% y-o-y.

Moving forward, we expect the Q3 2023 revenues to be on similar lines as the second quarter. Altogether, we forecast Citigroup revenues to touch $79.1 billion in FY2023. Additionally, C’s adjusted net income is likely to remain around $11.1 billion in the year. This coupled with an annual GAAP EPS of $5.92 and a P/E multiple of just above 9x will lead to a valuation of $56.

[1] Month-to-date and year-to-date as of 8/24/2023
[2] Cumulative total returns since the end of 2016

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