Andrew Bary
Citigroup is banking analyst Mike Mayo's favorite choice for next year because he thinks the longtime laggard is making progress in its strategic transformation and is on track to hit key financial targets by 2026.
"It's my dominant No. 1 pick and no other bank comes close," the Wells Fargo analyst told Barron's. "It was my No. 1 pick in 2024 and didn't perform the best. That creates even more of an opportunity."
Mayo thinks the stock can double over the next three years.
Citi shares, at around $72, are up 40% so far in 2024, better than Morgan Stanley and Bank of America, but behind Goldman Sachs Group and JPMorgan Chase. Still, Citi shares are no higher than they were in late 2018.
The stock yields 3%, and trades for 10 times the earnings per share expected for next year.
Mayo says that Citi has undergone a strategic transformation over the past few years under CEO Jane Fraser as it focuses on five core business areas. The most international of the major U.S. banks, Citi has exited consumer operations in 14 countries.
Mayo says Citi now gets 80% of its revenue from three top-tier businesses: a global services operation, including the No. 1 international payments business for corporations; a top five investment bank; and a top three U.S. credit-card company.
The corporate payment business could be Citi's crown jewel. The services unit is the biggest contributor to Citi's earnings and earns the highest returns among key divisions.
Citi's overall returns, however, remain anemic, and Fraser acknowledges that there is more work to be done. "So, while we are not yet where we want to be, the impact of the changes we are making is clearly evident in our momentum and improving performance," Fraser said on the company's third-quarter earnings conference call in October.
"The knock on Citi is that returns are awful and worst in class," Mayo said. JPMorgan, for instance, is earning a high-teens return on tangible equity, while Citi is at 7% so far this year. "The stock market assumes that it will have 7% returns indefinitely."
Mayo sees Citi hitting its financial targets and boosting its return on tangible equity to 11% to 12% in 2026. Mayo sees the company earning about $10 a share in 2026, in line with those targets.
Citi looks cheap based on its earnings and because it is the only major bank trading at a discount to tangible book value, which is now about $90 a share. Industry leader JPMorgan fetches 2.5 times tangible book.
Mayo says Citi has gone from being a "global mishmash" that underinvested in key businesses to a better-managed, more focused bank with stronger accountability under Fraser.
Mayo says the markets are taking the "under" on Citi's outlook, referring to a sports bet that the two teams in a game will score fewer than a certain number of points. He's taking the "over" on Fraser and her management group.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
December 10, 2024 10:02 ET (15:02 GMT)
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