Citigroup (C) is changing CEOs and its banking practices are under scrutiny. More regulations and higher taxes seem likely if Democrats take the Senate. However, the bank said it plans to begin buying back shares next year, after the OK from the Federal Reserve. Is there any reason to buy C stock, as of Dec. 23?
CEO Mike Corbat will step down next February, with Jane Fraser, president and the head of Citi’s global consumer banking business, succeeding him. She will become the first female CEO of a major Wall Street bank. She also takes charge of the most globally-exposed of the big U.S. banks.
Citigroup reported third-quarter results in October that beat expectations, helped by a bump in trading even as consumer banking struggled. But a week earlier, the Federal Reserve ordered the bank to tighten up its risk management protocols in the months ahead, and executives spent a good chunk of the bank’s third-quarter earnings call trying to address the matter.
Meanwhile, the Fed signaled on Dec. 16 that it will hold its benchmark interest rate near zero through 2023. That will lower rates on other forms of credit and, in turn, lower banks’ profits.
Citigroup stock is still not close to pre-pandemic levels. And it is nowhere near pre-Great-Recession heights. Below, we dive into whether Citigroup stock is worth buying right now.
Stress Tests And C Stock
The Fed on Dec. 18 released results its second stress test of the banking sector this year, finding that banks “could continue to lend to households and businesses even during a sharply adverse future turn in the economy.”
The Fed tacked on a second stress test this year — up from the usual one per year — in an effort to more closely track how banks were holding up as the pandemic shut down businesses and strained the economy.
When the central bank released those results, it also said banks could begin buying back stock again, with some limitations. It said that in the first quarter of next year, dividends and buybacks would be limited to an amount based on income over the past year. “If a firm does not earn income, it will not be able to pay a dividend or make repurchases,” it said.
Citigroup said it would “continue our planned capital actions” through the first quarter and third quarters of next year. Those plans included quarterly dividends of 51 cents per share. The bank also said “it is our intention to resume repurchases during that timeframe as well.”
Election Impact On C Stock
What new regulatory regime bank stocks face under a Biden administration could depend a lot of on the makeup of the Senate.
Two runoff elections in Georgia, set for January, will determine whether Republicans maintain Senate control or if the Democrats can advance to 50 seats, giving them broader leeway to deliver on their agenda.
Any regulations would have narrower prospects if the GOP holds onto the Senate. New restrictions were unlikely to be as tough as the ones instituted after the 2008 financial crisis.
Fed, OCC Crack Down
During a September conference, Citigroup CFO Mark Mason emphasized the company’s efforts since the 2008 financial crisis to simplify its business structure and focus on affluent customers and large multinationals and investors.
However, on Oct. 7, the Office of the Comptroller of the Currency fined the bank $400 million, citing Citi’s “unsound banking practices for its long-standing failure to establish effective risk management and data governance programs and internal controls.” In conjunction, the Fed issued a consent order against the bank, citing “significant ongoing deficiencies” in Citi’s risk management and internal controls.
The agency and the central bank said the problems in those areas had gone on for several years. They ordered Citigroup to take steps to improve in those and other areas.
The Fed said its most recent supervisory assessment found weakness in areas such as “data quality management and regulatory reporting, compliance risk management, capital planning, and liquidity risk management.”
Citigroup, during its third-quarter earnings call, acknowledged that “This won’t be a quick or easy fix.” And it said it was unable to gauge the costs of righting the ship.
During the call, an analyst asked management why the issues hadn’t been addressed sooner.
In response, Corbat said the bank had started “a number of significant remediation projects” to bolster its internal controls. “But that being said, we didn’t do it fast enough. And we’ve got to move faster, and that’s certainly where we’re going to be focused.”
Echoes Of Wells Fargo?
As the Wall Street Journal noted, Citigroup’s internal infrastructure is a patchwork of different systems absorbed over decades of deal-making. Still, Oppenheimer analysts advised investors to look past Wall Street’s barrage of questions.
“You cannot say ‘oh, this will cost us a billion or so, and we’ll have it done by the end of next year,'” they said in a research note.
“The Fed and the OCC will tell you when it’s done, not vice versa,” the analysts continued. “Management simply cannot say more, but basically the entire call was analysts pressing for that kind of answer which they should know management could not possibly give.
“This is, of course, not conducive to a good stock performance on the day, but we would recommend investors keep perspective and focus on the most probable case, rather than the worst possible scenario.”
The actions against Citi weren’t as harsh as those taken against Wells Fargo in the wake of its fake-account scandal. And the analysts noted that the case with Citigroup involved operational weaknesses, rather than “a violation of the trust of millions of customers.”
“Not all consent decrees are created equally and most are not like Wells Fargo’s,” they said.
Coronavirus Impact On C Stock
Through late February and March, C stock fell as fears over the coronavirus threatened to ripple through to the banks that loan people money and help with dealmaking. Cases continue to rise in much of the world, raising the odds of new restrictions to prevent large gatherings.
The pandemic restricted service for businesses of all kinds, forcing them to lay off employees and scramble to pay their bills. Companies have borrowed money, tapped lines of credit and renegotiated leases with landlords in an effort to keep from folding.
Banks have had to set aside billions as they brace for losses on loans. However, in the third quarter, those reserves were significantly smaller for Citigroup.
C Stock Fundamental Analysis
With more business concentrated outside the U.S. than its big-bank rivals, Citigroup has argued it can do a better job anticipating global changes for clients. However, that also means it’s more vulnerable to friction abroad.
The best stocks, by IBD’s standards, are capable of turning out consistent earnings growth. Before the pandemic, the last time Citigroup’s earnings declined was in 2016.
But during the first quarter of this year, they fell 44% then plunged 74% in the second quarter. In the third, they fell 32%.
For 2020, analysts expect Citigroup’s earnings to fall 44%.
Citigroup Stock Technical Analysis
Citigroup’s relative strength line, which compares a stock’s performance with the S&P 500, has rebounded since Nov. 6. Prior to that, it had fallen since June.
Last Word On Citigroup Stock
Investors should note that C stock, as with other bank stocks, rarely outperforms the market for extended periods, even when markets are stable.
The Citigroup earnings outlook is under pressure as near-zero rates squeeze net interest margins, while high unemployment hits retail and commercial lending.
The Banks-Money Center industry group, of which Citigroup stock is a member, also stands at 133 out of 197 groups tracked by IBD. The stock is not in a buy zone and hasn’t formed a base pattern.
Bottom line: C stock is not a buy right now, based on IBD’s research and MarketSmith analysis.
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