Is Citigroup Inventory A Purchase, Promote, Or Maintain Earlier than Upcoming Earnings? (NYSE:C)

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I upgrade my investment rating for Citigroup Inc. (NYSE:C) from a hold to a buy. In my earlier article for C released on January 21, 2022, I evaluated C’s Q4 2021 financial performance. My latest article provides a preview of Citigroup’s upcoming Q1 2022 financial results. There is a risk of C’s Q1 2022 EPS coming in below expectations, but this is already in the price. I view Citigroup’s current valuations as sufficiently attractive to warrant a Buy rating, with improving RoTCEs (Returns on Average Tangible Common Shareholders’ Equity) as a key catalyst in the intermediate term.

C Stock Key Metrics

In my January 2022 update for Citigroup, I deemed Citigroup’s fourth-quarter results to be poor, as I assessed that C’s “core earnings, excluding the impact of share buybacks, would have been flattish YoY in the recent quarter.”

The key metrics for C that are worthy of attention relate to the company’s stock price performance. Year-to-date in 2022, Citigroup’s shares have done rather poorly on both an absolute and relative basis.

2022 Year-to-Date Share Price Performance For C And The Other “Big Four” Banks

2022 Year-to-Date Share Price Performance For C And The Other

Seeking Alpha

As per the chart above, Citigroup’s stock price declined by -15.8% in 2022 thus far. As a comparison, the other “Big Four” banks performed relatively better. Wells Fargo & Company’s (WFC) shares were up +1.6% year-to-date; while the share prices of Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM) decreased by -10.8% and -15.7%, respectively, during the same period.

It is not a big surprise that banking stocks in general have not done very well this year. A recent March 31, 2022 article from The Associated Press noted that “bond yields fell and weighed down banks, which rely on higher yields to charge more lucrative interest on loans.” This does explain the weak performance of the banking sector to a large extent.

But C’s relative share price underperformance is worthy of note, and this could be linked to negative expectations with regards to the bank’s 1Q 2022 earnings which I elaborated on in subsequent sections of this article.

Is C Stock Overvalued Now?

Prior to previewing Citigroup’s upcoming earnings, it is relevant to assess C’s current valuations following its share price correction in the early part of this year.

According to valuation data sourced from S&P Capital IQ, Citigroup now trades at 0.64 times trailing price-to-tangible book value (P/TBV) and 7.8 times consensus forward fiscal 2022 normalized P/E as per its last done share price of $50.88 as of April 8, 2022. In contrast, C’s 10-year mean forward P/E and trailing P/TBV valuation metrics were 9.7 and 0.89 times, respectively. This suggests that Citigroup’s current valuations are quite appealing as they are substantially lower than compared to historical average levels.

C is also valued at a discount to its peers. WFC, BAC, and JPM currently trade at much higher historical P/TBV multiples of 1.33 times, 1.82 times, and 1.89 times, respectively, as per S&P Capital IQ. Citigroup highlighted at the bank’s 2022 Investor Day on March 3, 2022 that it “averaged a 10.2% RoTCE (Return on Average Tangible Common Shareholders’ Equity) from 2017 to 2021, compared to ~13% at peers” and this helps to explain why the market assigns higher valuation multiples to C’s peers.

But things could possibly change going forward. Citigroup has set a goal of generating RoTCEs in the 11-12% range within the next 3-5 years, as highlighted in the chart below.

C’s Initiatives And Actions To Drive RoTCE Higher

C

Citigroup’s 2022 Investor Day Presentation

Citigroup’s depressed valuations reflect low expectations, and I think that C’s share price can recover in the medium term assuming that the bank is successful in delivering better returns. In a nutshell, C stock is undervalued as opposed to being overvalued now.

When Does Citigroup Report Earnings?

A press release issued on April 6, 2022 indicates that Citigroup’s Q1 2022 earnings announcement will happen this Thursday, April 14, 2022.

What To Expect From Earnings

There is downside risk to Citigroup’s upcoming Q1 2022 earnings considering two key factors.

One key factor is C’s exposure to Russia.

In the company’s FY 2021 10-K filing published on February 25, 2022, C disclosed that it has approximately $5.5 billion worth of direct exposure to Russia as of December 31, 2021 or 0.3% in percentage terms as a proportion of assets. At its 2022 Investor Day on March 2, 2022, Citigroup also highlighted that it has “other exposures that we have to the Central Bank and other third-party institutions” in Russia which includes “reverse repo assets that we have and as well as our cross-border exposures from Russian entities outside of Russia.”

C estimated at the Investor Day that the bank’s total exposure (direct and indirect) to Russia is around $9.8 billion. The bank also guided that its loss exposure based on “a severe stress scenario” might “be a little less than half of that exposure.”

There is uncertainty over the extent of Citigroup’s provisions or write-downs in relation to its Russian assets and exposures. As such, C’s actual Q1 2022 earnings or EPS might be lower than what the market anticipates.

Another key factor is share buybacks.

C guided at its Q4 2021 results call on January 14, 2022 that its share repurchases for Q1 2022 will be at “similar levels” comparable to the share buybacks it did in Q2 2021 and Q3 2021. At the bank’s March 2022 Investor Day, Citigroup reiterated that Q1 2022 “share repurchases” will be “in line with prior guidance.” But Citigroup appeared to be cautious about the pace of future share buybacks for the rest of this year citing multiple factors for consideration, as per the excerpt below from the company’s Investor Day presentation slides.

The Outlook For C’s Share Repurchases In 2022

The Outlook For C

Citigroup’s 2022 Investor Day Presentation

In other words, lower-than-expected share buybacks could pose downside risks to Citigroup’s full-year FY 2022 earnings per share. C’s 1Q 2022 share repurchases might also be slightly below market expectations, considering the company has not given a specific number for the actual amount of buybacks it will do.

Citigroup spent $3 billion on share buybacks per quarter for both Q2 2021 and Q3 2021. But the wording of the Q1 2022 share repurchase qualitative guidance, “similar levels”, can be interpreted broadly, and some sell-side analysts might have forecasted a higher quantum of share repurchases in the first quarter of this year when estimating the bank’s EPS.

What Is Citigroup’s Forecast?

The consensus EPS forecast for C in Q1 2022 is $1.40 as per S&P Capital IQ.

Revisions To 2022 Consensus EPS Estimates For Citigroup In The Last One Month

Revisions To 2022 Consensus EPS Estimates For Citigroup In The Last One Month

Seeking Alpha

As highlighted in the chart above, analysts have been cutting their Q1 2022 bottom line EPS forecasts aggressively in the past month. Specifically, the first-quarter EPS estimate was reduced by -21% between early March and early April. This is aligned with my views expressed earlier that the expected weak financial performance for C in the first quarter of 2022 should be factored into its consensus numbers and valuations to a large extent.

My own 1Q 2022 EPS forecast for Citigroup is $1.35, which implies a -4% earnings miss. But I expect the “whispered numbers” (buy-side investors’ real expectations) for C in Q1 2022 to be even lower than what consensus forecasts suggest. As such, I am of the view that even if C misses the headline earnings numbers, the market’s reaction should be relatively muted taking into account its current valuations.

Is C Stock A Buy, Sell, or Hold?

C stock is a buy call based on valuations. The company’s shares are now already trading at under two-thirds of its tangible net asset value, and it will take a substantial earnings miss in Q1 2022 to drag its share price down further which I think is less likely.

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