Citigroup: Still A Hold Rather Than A Buy, But The Reasons Why Have Changed

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Citigroup has higher exposure to Credit Cards and Consumer Loans than its competitors.Falling interest rates will positively affect Citi in two ways. Citi's funding disadvantage will be decreased, and...

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Citi's funding disadvantage will be decreased, and...</p>\n\n<a href=\"https://seekingalpha.com/article/4705899-citigroup-still-a-hold-rather-than-a-buy-but-the-reasons-why-have-changed\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Citigroup: Still A Hold Rather Than A Buy, But The Reasons Why Have Changed</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCitigroup: Still A Hold Rather Than A Buy, But The Reasons Why Have Changed\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-24 03:44 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4705899-citigroup-still-a-hold-rather-than-a-buy-but-the-reasons-why-have-changed><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Citigroup has higher exposure to Credit Cards and Consumer Loans than its competitors.Falling interest rates will positively affect Citi in two ways. Citi's funding disadvantage will be decreased, and...</p>\n\n<a href=\"https://seekingalpha.com/article/4705899-citigroup-still-a-hold-rather-than-a-buy-but-the-reasons-why-have-changed\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0882574139.USD","symbol_name":"富达环球消费行业基金A ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4705899-citigroup-still-a-hold-rather-than-a-buy-but-the-reasons-why-have-changed","article_id":"2453064240","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/473005986/image_473005986.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2453064240","pubTimestamp":1721763850,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Citigroup has higher exposure to Credit Cards and Consumer Loans than its competitors.Falling interest rates will positively affect Citi in two ways. 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Citi's funding disadvantage will be decreased, and the credit quality of loans on its books will improve.However, Citigroup still makes a substandard ROE and progress on expense reduction is minimal.As well, Citi's poor record of risk management means a risk premium should be applied to its equity. All in all, it's only a Hold.   _ultraforma_I opened coverage on $Citigroup Inc(C-N)$. (NYSE:C) six weeks ago and analyzed which was correct; the market's view, that Citigroup's current Price/Book ratio is appropriate, or, that conventional wisdom, which is that this ratio is too low. I concluded that there were a number of reasons which justified Citigroup's low Price/Book ratio, and that conventional wisdom was wrong. \"At current prices, it’s definitely not a Buy. It might be a Sell. In the end, I rate it as a HOLD.\" The ensuing six weeks have seen a number of important developments. Unexpected political developments in both Mexico and the United States that have increased the chances of event risk in both countries. Economic Data has increased the probability of rate cuts. The release of the Fed's Annual Stress Test Results and quarterly earnings were released by Citigroup and its peers. We also saw additional fines levied upon Citigroup by the Office of the Comptroller of the Currency. I re-iterate my rating of a HOLD on Citigroup's equity, but for reasons that are different than six weeks ago. Here's what we have learned. Mexico Is Immaterial To Citigroup's Valuation In 2022, Citigroup announced plans to sell its wholly owned subsidiary, Banamex. During the first three quarters of 2021, \"the businesses Citi intended to exit together accounted for approximately $3.5 billion in revenue, $1.2 billion in earnings before tax, $44 billion in assets, and $4 billion in average allocated TCE.\" The information in Table 1 is sourced from Citigroup's Second Quarter 2024 Earnings Presentation. It would appear that the Mexican business has performed in line with its performance when it was first put up for sale, although first half results for 2024 appear to be poor. Table 1: Mexico Consumer / SBMM Data Earnings Results Presentation Second Quarter 2024, Page 18 In May 2023, Bloomberg reported that a $7 billion sale to Grupo Mexico SAB was nearing. However, several weeks later, Citigroup announced that the sale would not proceed. Instead, the bank would be separated into two units, a Retail Banking unit, and another unit that would consist of Banamex's Institutional and Private Client businesses. Citigroup still intends to spinoff the retail business in the second half of 2025 via an IPO. Although the broader Mexican stock market is at approximately the same level today in US Dollar terms as it was in May 2023, it would be speculative to assign a range of values to the retail business as a standalone entity. As per Table 2, publicly traded Mexican Banks such as Banco del Bajio (OTC:BBAJF) and Banorte (OTCQX:GBOOY) have ROEs and Growth Rates that are much higher than Citigroup's overall numbers, and they are priced at much lower multiples. An IPO of the Mexican business will therefore likely have a mildly adverse effect upon many of Citigroup's valuation metrics such as ROE, P/E Ratio, Price to Sales, Price to EBIDTA etc. Table 2: Valuation of Publicly Traded Mexican Banks     Citigroup Banco del Bajio Banorte   Market Cap USD* $124.3 billion $3.8 billion $23.8 billion   P/E Ratio (TTM)* 18.05 5.63 7.56   P/E Ratio (FWD)* 11.39 - 6.89   Net Income 3 Year CAGR -27.30% 52.63% 21.44%   ROE 4.04% 26.63% 21.04%   Click to enlarge * As of July 19, 2024, Data From Seeking Alpha On June 2, 2024 Mexico elected its first female president, and its first Jewish president – Claudia Sheinbaum. The peso sold off 10% almost immediately, and over the next few days, the stock market sold off 20%. Citigroup's shares barely reacted to this event, and its return over the five days following the election closely approximated that of other US Banks such as JPMorgan. In retrospect, this isn't surprising. The original $7 billion valuation, which ultimately wasn't paid, only represents 5.6% of Citigroup's current market cap, and it is unclear if the assets that will be included in the proposed IPO are identical to those that were on the block in 2022 and 2023. Graph 1: Citigroup's Returns Versus Mexico And The S&P 500  Data by YChartsFalling Rates Are A Double Edged Sword - They Cut Both Ways June's inflation report was released on July 15 - CPI came in at 3.0%, down from 3.3% in May, and better than the market's expectation of 3.1%. Later that day, Federal Reserve Chair Jerome Powell said that with regard to rate cuts, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long...\". The market rapidly factored this information into its consensus projections, and the CME Group’s FedWatch Tool showed an 89% chance of at least one rate cut by the September 17-18 Fed meeting, up from 73% on Wednesday July 10, and around 50% the week before. Bank Shares reacted positively, jumping by approximately 3-5% over the next two trading days, before subsequently decreasing. Graph 2: The Impact Of An Increased Probability of Interest Rate Cuts Upon Bank Shares  Data by YChartsPerhaps investors decided to take profits on the 18th, or perhaps they remembered how lower rates effect Net Interest Margins. The Net Interest Margin (NIM) of a bank is a key driver of its profitability. Graph 3 and Chart 1 are reproduced from an article by Vanguard. Graph 3: US Banks Aggregate NIM Over Time Why fears about US bank profitability are misplaced 10 April 2023, Vanguard As Chart 1 shows, there is a positive correlation between short term interest rates, as measured by 3-Month T-Bill Rates, and NIM. Chart 1: Short Term Rates By Quartile Versus Net Interest Margin Why fears about US bank profitability are misplaced 10 April 2023, VanguardAll other things being equal, lower rates should have a negative effect on bank profitability. However, all other things are not equal. The shape of the yield curve is also a driver of profitability. Banks borrow short, from depositors or from the capital markets, and lend long. A positively sloped yield curve increases the spread between a bank's cost of funds, and the rate at which it lends at. The yield curve has been inverted since 2022, and this has been a head wind that banks have had to fight through in order to lend profitably. Most investors are familiar with the 2-Year/10-year Treasury spread, due to its record of predicting recessions. As per Graph 4, it is now at its lowest level of inversion in two years, significantly less inverted than it was on July 3, 2023, when 2-Year treasuries yielded 1.08% more than 10-year bonds. Graph 4: Two Year - Ten Year Yield Spread  Data by YChartsThirty year bond yields are an important data point in mortgage pricing, so the spread between 2-year treasuries and 30-year bonds is also important. This spread has also been de-inverting, and currently, 30-year bonds yield only 7 basis points less than 2-year bonds. When and if the Fed cuts its overnight rate, the short end of the curve will likely be affected more than the long end, and at some point in time, the yield curve will become positively sloped. So in absolute terms, there are two trends at play. Lower rates are expected to lower the NIM for all banks, thereby decreasing profitability. However, lower rates should also contribute to the normalization of the yield curve, which will in turn make it easier for banks to lend more profitably. It is difficult to say which effect will be stronger, but one thing can be said with a relatively high degree of confidence. That is, that relative to its peers, Citigroup will likely fare better if rates decrease. Citibank is a high cost funder. As per Table 3 in this article, at the end of Q1 2024, Citigroup had Total Retail Deposits of $1.31 trillion and Total Assets of $2.43 trillion. Therefore its Deposit to Total Asset Ratio was 53.7%. The comparable figures for JPMorgan, Bank of America, and Wells Fargo were 59.3%, 59.4%, and 70.6%. A greater proportion of Citigroup's funds are therefore raised using more expensive Commercial Paper or other forms of capital market funding. As rates fall, credit spreads tend to compress. Consider two hypothetical banks, one that funds itself with retail deposits that cost 5%. The other must pay a credit spread of 50 bps to access capital market funding at an all in cost of 5.50%. The 50 bps credit spread is equal to 10% of the cost of retail funds. If rates fall to 3%, then that 50 bps credit spread equates to 16.7% of the cost of retail deposits, and if rates continue to fall to 1%, then a 50 bps credit spread equates to 50% of the cost of retail deposits. So, one would expect that Citigroup's funding disadvantage will lessen as rates decrease. Citigroup Is More Exposed To Consumers Than Its Peers Are On June 28, 2024 the Fed released the results of its 2024 Stress Tests of 31 large US Banks. The modeling assumptions made in the Severely Adverse Scenario are; i) The Unemployment Rate rises to 10%, ii) Real GDP decreases by 8.5%, iii) The housing market sells off by 36%, iv) Commercial Real Estate Prices fall by 40%, v) 3-Month T-Bill Yields fall to 0%, vi) Credit Spreads on BBB corporate bonds increase from 4.1% to 5.8%, and, vii) The stock market falls by 55%. Under this scenario, projected losses for the banking sector as a whole were greater than previous years, both in absolute terms, and relative to the aggregate common equity tier 1 (CET1) ratio of the 31 banks tested. The aggregate CET1 ratio would fall from an actual level of 12.7% in the fourth quarter of 2023, to a projected minimum of 9.9%. This represents a 2.8% drop which is greater than 2023's decrease of 2.5%, and which is the largest decrease since 2018. However, as most banks have shored up their capital positions in recent years, even after this projected drop, the banking system has sufficient capital to absorb nearly $685 billion in losses and continue lending to households and businesses under stressful conditions. Table 3 shows how Citigroup was forecast to perform in the Severely Adverse Scenario relative to other money center banks. Citigroup is projected to have the largest losses relative to its capital base, but because it is starting from a relatively high base, its projected minimum CET1 Ratio is forecast to remain comfortably in excess of the minimum ratio required by its regulators. Table 3: Actual CET1 Ratio Q4 2023 Versus Projected Minimum Ratio      Actual CET1 Ratio Q4 2023 Projected Minimum CET1 Ratio Projected Decrease in CET1 Ratio   $Bank of America Corp(BAC-N)$. 11.8 9.1 2.7   Citigroup Inc. 13.4 9.7 3.7   JPMorgan Chase & Co. 15 12.5 2.5   Wells Fargo & Company 11.4 8.1 3.3   Median - - 2.6   Click to enlarge The largest component of the $685 billion of projected aggregate losses are losses on credit card balances. Page 13 of the results state that, Household savings have declined following the depletion of pandemic-era savings, which has caused credit card balances to reach new highs (see figure A). Despite modest loan growth in most sectors, credit card balances grew 12 percent in 2023 and represent 12 percent of banks’ total loans, in aggregate. At the same time, credit card performance has deteriorated over recent years. The delinquency rate has steadily risen over the past several years (see figure A), while net charge-offs have sharply increased since last year. Overall, the significant growth in banks’ credit card balances and performance deterioration leads to greater losses in the 2024 stress test than in recent years. In the 2024 stress test, banks are projected to lose $175 billion on credit cards, or 17.6 percent of average portfolio balances. This represents 26 percent of total projected losses.  Citigroup's Market Cap is only 21% of JPMorgan's (JPM). However, the total projected losses from Credit Cards for both banks are roughly the same, $30.5 billion for JPMorgan, and $29.1 billion for Citigroup. Citigroup's projected losses are also three times greater than Wells Fargo's (WFC) projected losses, despite the fact that Wells Fargo is approximately 38 percent larger than Citigroup is. Citigroup's Credit Card business has its headquarters in South Dakota, a low cost state with a zero percent corporate tax rate. As well, as per Statute 54-3-1.1 of South Dakota's Codified Law, \"there is no maximum interest rate or charge, or usury rate restriction between or among persons, corporations, limited liability companies, estates, fiduciaries, associations, or any other entities...\" Given that there is no limit on the interest rate that Citibank can charge, and that risky borrowers with poor credit pay the highest rates, it is perhaps no surprise that Citigroup's projected loss rates are higher than average. Particularly noteworthy is Citi's projected loss rate of 20.2% for consumer loans as compared to Bank of America's (BAC) projected loss rate of 2.5%. Clearly Citigroup's underwriting standards are more lenient compared to other banks, and moving to a state with no usury laws appears to have been strategic, as there is likely less competition in this market segment, and higher rates are necessary to compensate for higher risk. Table 4: Projected Losses And Charge Off Rates     Bank of America Citigroup Inc. JPMorgan Chase Wells Fargo   Market Cap $333.5 billion $124.3 billion $596.9 billion $201.5 billion   Projected Losses Credit Cards $17.0 billion $29.1 billion $30.5 billion $9.7 billion   Projected Loss Rate Credit Cards 16.1% 16.9% 16.4% 18.6%   Projected Losses Consumer Loans* $2.2 billion $3.0 billion $2.7 billion $3.6 billion   Projected Loss Rate Consumer Loans 2.5% 20.2% 3.1% 5.4%   Click to enlarge * Other consumer loans include student loans and automobile loans. In my opinion, the Fed has engineered a soft landing which will entail relatively low rates of inflation and unemployment. Further, improved productivity will allow wages to grow at a faster rate than inflation. In such circumstances, consumer balance sheets will improve, and Citigroup will benefit more than its peers. Lower loss rates will, in of themselves, lead to higher income. They will also lower capital charges as asset quality improves, thereby leading to improved ROE prints. It must be noted that there will be a new president and congress in 2025 that could upset this rosy scenario. Both a Republican and a Democrat administration may pursue inflationary policies, such as trade wars and increased tariffs, or, higher government spending/deficits. Still, I believe that Citigroup's asset mix will allow it to benefit from lower rates more than most other banks. Disappointing (to me at least) Second Quarter Results Citigroup's ROE, Net Income Margin, and other measures of profitability are much worse than those of its peers. Management has stated on a number of occasions that in order to approach the market standard, it must execute on a number of fronts. It has exited 14 overseas businesses since 2021 in order to release capital, and to rationalize its cost structure. Significant sales of businesses have occurred in India, Poland and Hong Kong; Mexico would appear to be next. Management has also devoted resources to Wealth Management because, \"It offers high returns and it creates growth opportunities in areas that are in the early stages of wealth generation...\" and, \"it comes with less risk of big mishaps...\". Early returns were not promising. Instead of growing at a high single digit to low double digits rate, wealth management revenue fell 5% year over year in the first two quarters that the new strategy was implemented. Finally, management wants to rationalize its cost structure. It announced in October 2023 that its institutional client division would be shuttered, five layers of management would be stripped, and 20,000 employees would be let go. As a result, Citi took a charge of $3.8 billion in the first quarter of 2024, with $780 million of this amount being related to severance costs. The cuts are meant to be part of plans to save up to $2.5 billion in expenses over the 'medium term'. No timeline was specified, and I am unaware of any other disclosure that has been given as to the other parts of the plans to produce $2.5 billion in savings. A miss or a beat of a few percentage points in revenue or earnings can obviously be significant, as can management's guidance for the next few periods. These are largely short term in nature, however, and what interested me most about Citi's Second Quarter Financial Statements were indications of how it is executing on its strategic goals. Here are some of the main points;  Revenue was a mild beat $20.14 billion versus the consensus forecast of $20.09 billion. EPS on a diluted basis was $1.52, an increase of 14.3% YoY. This too was a beat, as the street's expectations were for an EPS of $1.41. However, earnings were boosted by an exceptional gain of $403 million on the sale of Visa Shares owned by Citigroup. This one-time gain is estimated to be equal to $0.21 EPS. After netting it out, earnings would be down (1.5%) YoY. There was some progress on reigning in expenses. Comparisons with recent quarters are misleading due to the various restructuring and re-positioning charges that have been taken. However, when compared to the second quarter of 2023, expenses decreased by approximately $200 million, or 2%. Once again, however the news is mixed. Management's guidance was that Citi expects FY24 expenses to be in line with $53.5B-$53.8B ex-FDIC special Penalties, albeit likely at the higher end. Wealth Management remains a work in progress as its ROTCE of approximately 6% trails Citigroup's overall ROTCE. Management highlighted the fact that Client Balances were up 9% YoY, and Investment Assets were up 15% YoY. However, many of Citi's competitors reported similar or greater increases, and several, such as JPMorgan, attributed this as being largely due to market gains in a year when the S&P 500 had risen by 25%. This space remains very challenging and competitive, it is not clear what competitive advantage Citigroup brings to the table. Management re-iterated its goal of achieving an ROTCE of 10% by FY26. The ROE for the quarter was 6.3% and the ROTCE 7.2%. These were slightly better (70/80 bps) than the same quarter in 2023, when the respective figures were 5.6% and 6.4%. It should be noted that Q2's figures were elevated by the exceptional gain of $403 million that was related to the sale of Citi's position in Visa.  As per Chart 2, Services is the Crown Jewel. Although Banking shows a double digit return, once again, it should be noted that most of the $403 million profit from the sale of Citi's Visa position was booked in this unit, and when considering recurring income, this figure is inflated. Chart 2: ROTCE By Business - Second Quarter 2024 AND YTD   Citigroup Earnings Results Presentation Second Quarter 2024, Page 27Management has a stretch goal of achieving a 10% ROTCE by 2026, but there isn't great visibility regarding how it will achieve this. Mexico is really the only international holding left to sell, and Citi has been working on this transaction for three years. This quarter's reduction in expenses of $200 million is a good start, but Citi's efficiency ratio is still at an elevated level of 66%. Although this is in line with its peers (BAC - 63.9%, WFC - 64%, and JPM - 47%), 50% is considered to be the level that indicates that a bank is reasonably efficient. So all in all, it's a mixed picture regarding if Citigroup will be able to execute on its strategic initiatives. Markets Punish Banks That Can't Manage Risk Or Do Math Citigroup's risk management record is not stellar, and its experience with the Fed's Annual Stress Tests haven't always been positive.  In 2023, Citigroup was, \"the worst performer among the eight US global systemically important banks ... The bank missed the Fed’s projected hit to its Common Equity Tier 1 capital ratio by 170 basis points under the severely adverse scenario. It also overshot its projected stressed Tier 1 leverage ratio and supplementary leverage ratio (SLR) by 110bp and 80bp.\" In 2022, Citibank's results were worse than expected and its stress capital buffer, or SCB, had to be increased by approximately 100 basis points. Citi regularly has bad news on this front. In the last week of June 2009, Citi's performance on the stress test was described as more like an F than a B+. In 2012, Citigroup received a quantitative objection from the Fed for falling short of the 5% minimum Tier 1 capital requirement. It also received another quantitative objection in 2014, because it couldn't make revenue and expense projections under the scenarios that were being run that year. And 2017, was yet another bad year. There have also been a number of other issues, including,  On October 7, 2020, a Cease and Desist Order against Citibank was issued by the Office of the Comptroller of the Currency related to deficiencies in its enterprise-wide risk management, compliance risk management, data governance, and internal controls. There was also a fine of $400 million levied. Three separate directives were sent from the Fed in 2023 that ordered Citigroup to change its methodology for measuring both the risk of counterparties defaulting on derivative contracts, and the amount of capital required to support this risk. A further directive was also sent in February 2024.    This track record is one reason why Citi's shares reacted so positively when Citigroup was seen to be a winner when this year's results were announced on June 28. Table 5 shows the daily performance of Citi's shares over the past three weeks. Note how well they were performing until July 10th and 11th. Table 5: Daily Returns Citigroup   Date Daily Return Date Daily Return Date Daily Return   June 28 3.10% July 8 1.11% July 15 0.96%   July 1 -0.05% July 9 2.80% July 16 3.27%   July 2 1.97% July 10 0.65% July 17 0.51%   July 3 -0.34% July 11 -1.90% July 18 -4.02%   July 5 -0.67% July 12 -1.82% July 19 0.39%   Click to enlarge Here's what happened on the days that are shaded;  Citigroup received positive news regarding its Stress Test Results on June 28. Citi's shares rallied 8.57% between this date and July 10. After the close of business on July 10, the OCC issued a press release stating that it was amending its Cease and Desist order filed against Citigroup on October 7, 2020, because Citi had not yet cured all of the issues raised. Citi received a $75 million penalty from the OCC, and the Fed imposed another civil penalty of $61 million, for total penalties of $136 million. Over next two days, Citi's shares sold off 3.27%, which equates to a decrease in its market cap of approximately $4 billion. CPI was released nn the morning of July 15. Later that day Jerome Powell made dovish comments that changed the market's perception of the possibility of early rate cuts. Banks in general rallied over the next three days, and Citigroup was no different. I presume that the 4% selloff on July 18 was profit taking.  Citigroup is up slightly in the month of July, but it has lagged behind its peers. And that's a shame. All of the good work and positive sentiment from Citi's positive Stress Test Results have been undone, leaving only a small increase in Market Cap that is the result of lower rates being priced into its equity. Maybe devoting resources to businesses like wealth management, where Citigroup must compete against larger competitors that have trillions of AUM and businesses that are 10 or 20 times larger, is the way for Citigroup to get to the promised land. However, if management really wants to engineer a re-rating of Citi's common equity, it should bear in mind that its Credit Card Business and Consumer Loan business are responsible for a large portion of Citi's NOI, risk, and capital usage. It should also bear in mind that the assets in these businesses carry more risk than comparable businesses at banks such as JPM, BAC or WFC. Learning how to properly measure the risk of these assets, as well as the risk inherent in Citi's other businesses will allow it to apply the correct amount of capital to the correct pools of risk, make better decisions, and ultimately improve performance. It will also increase the confidence of outside investors and the Fed, leading to a lower risk premium, and ultimately, higher multiples. Conclusion Citigroup Inc. is not a Buy. If you have excess capital to deploy to the financial sector, there are banks that regularly earn a 15% to 20% ROTCE, at similar or lower valuations that have a much smaller risk of losses coming out of the blue. If all goes well for Citigroup, it might earn a 10% ROTCE in the next few years. To do so, it will need to execute on its plans to cut costs - the jury is still out regarding this. It will also have to rationalize its corporate structure and execute on the growth opportunities it is currently pursuing. So there are better places to put new money. However, I still have it as a HOLD.  Falling interest rates will be of greater benefit to Citigroup than they will for its competitors, because this will decrease Citi's funding disadvantage. My macro view is that there will be a soft landing that will allow consumer balance sheets to repair themselves. Citi will benefit more from this than most others, because losses will trend down. As well, the credit quality of its overall credit card and consumer loan portfolio will improve more than those of its competitors. This is because there is more room for improvement. Lower capital usage and higher ROE will result from this.   Finally, Citi has some very good businesses that appear to be being penalized for deficiencies elsewhere in Citi's operations. Sometimes the best thing to do with an old clunker is to strip it for parts, and sell the body and chassis to a scrap yard. Perhaps some smart Vulture fund will start accumulating stock with a view to breaking Citigroup into its constituent parts, thereby releasing value.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2453064240"}