Here’s why Citigroup’s stock stands out among the biggest U.S. banks

The “big six” U.S. banks have all reported their fourth-quarter results, wrapping up a difficult 2022, when soaring interest rates forced a decline in several areas of business.

Citigroup Inc.
C
has the distinction of being the only one of these banks to trade below its tangible book value and it also has the lowest forward price-to-earnings ratio.

Below is a screen of valuations and analysts’ sentiment for the big six banks, which also include JPMorgan Chase & Co.
JPM,
Bank of America Corp.
BAC,
Wells Fargo & Co.
WFC,
Goldman Sachs Group Inc.
GS
and Morgan Stanley
MS.
This is followed by a look into the group’s exposure to problem loans.

For a rundown of how the big banks have fared this earnings season, see the following coverage from Steve Gelsi:

It may already be recovery time for big banks’ stocks

There has been no shortage of pain points for the banking industry, including rising interest rates; declining volumes for securities trading, underwriting and M&A deals; and fear of a possible recession. But investors are looking ahead, and as we will see lower down, loan quality remains strong.

Here’s how the S&P 500
SPX
banking industry group has performed since the end of 2021, with dividends reinvested, according to FactSet:


FactSet

The banks have only outperformed the full index slightly since the end of 2021. But the banks fell harder than the broad market did last year, and they have staged a sharp recovery since mid-December. So far in 2023, Citi’s stock is up 11%, which has only been exceeded among the big six by Morgan Stanley’s 14% return.

Screening the big banks’ stocks

Here are the big six, sorted by market capitalization, with two valuation ratios:

Bank

Ticker

Market cap ($bil)

Forward P/E

Price/ tangible book value

2023 total return

2022 total return

JPMorgan Chase & Co.

JPM $413

10.9

1.9

6%

-13%

Bank of America Corp

BAC $277

9.9

1.6

4%

-24%

Wells Fargo & Co.

WFC $168

9.2

1.3

7%

-12%

Morgan Stanley

MS $164

13.0

2.4

14%

-10%

Goldman Sachs Group Inc.

GS $118

10.3

1.3

2%

-8%

Citigroup Inc.

C $97

8.6

0.6

11%

-22%

Source: FactSet

Tangible book value (TBV) deducts intangible assets, such as goodwill and deferred tax assets, from book value.

Citi is not only the cheapest by P/E and price/TBV ratios, but also has the highest dividend yield in the group:

Bank

Ticker

Dividend yield

Jan. 18 price

Current annual dividend rate

Estimated dividends for 2023

JPMorgan Chase & Co.

JPM 2.84%

$140.80

$4.00

$4.16

Bank of America Corp

BAC 2.55%

$34.52

$0.88

$0.93

Wells Fargo & Co.

WFC 2.72%

$44.12

$1.20

$1.32

Morgan Stanley

MS 3.19%

$97.08

$3.10

$3.18

Goldman Sachs Group Inc.

GS 2.86%

$349.92

$10.00

$10.45

Citigroup Inc.

C 4.05%

$50.31

$2.04

$2.08

Source: FactSet

Analysts polled by FactSet expect all six banks to raise dividends, at least slightly, this summer. The consensus 2023 dividend estimates are for the full year, which means the annual dividend rates would be a bit higher, since the payout increases have been announced in recent years along with second-quarter earnings.

It is possible that the Federal Reserve will curtail dividend increases this year during its annual stress tests. Investors probably won’t see the full results of these tests until July, according to Moody’s analytics. Higher payouts may also be less likely as banks lay off staff members to cut costs. But dividend cuts seem unlikely because the banks remain profitable and credit quality hasn’t become a problem so far in this economic cycle.

Leaving the group again in the same order, here’s how analysts working for brokerage firms feel about these bank stocks:

Bank

Ticker

Share “buy” ratings

Jan. 17 price

Cons. Price target

Implied 12-month upside potential

JPMorgan Chase & Co.

JPM 62%

$140.80

$156.67

11%

Bank of America Corp

BAC 57%

$34.52

$40.80

18%

Wells Fargo & Co.

WFC 79%

$44.12

$53.13

20%

Morgan Stanley

MS 56%

$97.08

$100.08

3%

Goldman Sachs Group Inc.

GS 54%

$349.92

$392.11

12%

Citigroup Inc.

C 37%

$50.31

$57.17

14%

Source: FactSet

Citi is the least-loved among analysts polled by FactSet, with only 37% rating the shares a “buy” or the equivalent. All of the other banks on the list have majority “buy” ratings.

Keep in mind that the ratings are mainly based on 12-month outlooks. That might be considered a short period for an investor riding out an economic cycle. There have been many warnings of a recession as the Federal Reserve continues to tighten monetary policy to fight inflation. And corporate layoff announcements are flowing almost daily.

Among the analysts with neutral ratings on Citigroup is David Konrad of Keefe, Bruyette & Woods, who wrote in a note to clients on Jan. 16 that despite having “longer-term upside potential,” the stock “lacks near-term catalysts and expenses are expected to weigh on near-term returns.”

While agreeing that Citi is “spending too much,” Oppenheimer analyst Chris Kotowski rates the shares “outperform,” with a 12-18 month price target of $83, which would make for upside potential of 65% from the closing price of $50.31 on Jan. 17.

In a note to clients, Kotowski pointed to Citi’s rising expenses as a problem for the stock, but also wrote that with a high level of regulatory capital, he expects the bank to resume buying back shares in the third quarter. “It’s frustrating, but at 61% of TBV, we think the stock is too cheap to ignore,” he added.

Credit quality could be a silver lining

In his coverage of the big banks’ earnings results, Gelsi discussed the decline in capital markets and related revenue, as well as the hit to earnings taken by the banks as they set aside more money to cover anticipated loan loss reserves.

Let’s take a closer look at the credit indicators. Here’s how much the big six added to their loan loss reserves during the fourth quarter, with comparisons to the previous and year-earlier quarters. The numbers are in millions:

Bank

Ticker

Q4 2022 provision for loan loss reserves

Q3 2022 provision for loan loss reserves

Q4 2021 provision for loan loss reserves

JPMorgan Chase & Co.

JPM $2,288

$1,537

-$1,288

Bank of America Corp

BAC $1,092

$898

-$489

Wells Fargo & Co.

WFC $957

$784

-$452

Morgan Stanley

MS $87

$35

$5

Goldman Sachs Group Inc.

GS $972

$515

$344

Citigroup Inc.

C $1,820

$1,338

-$503

Total

$7,216

$5,107

-$2,383

Source: FactSet

Banks build loan loss reserves to cover expected credit losses. These quarterly additions to reserves are called provisions, and they directly lower pretax earnings. Banks typically set aside more for reserves as the economy slows to get ahead of expected loan defaults, and when the economy recovers, the provisions may turn negative and boost earnings.

The big six set aside $7.2 billion for reserves during the fourth quarter, which was a large increase from $5.1 billion in the third quarter. Looking back a year, earnings were enhanced during the fourth quarter of 2021 when the combined provision was -$2.38 billion.

But even the $7.2 billion combined provision during the fourth quarter wasn’t very high. During the first two quarters of 2020, the six banks’ provisions totaled $44.7 billion — they couldn’t know at that time how significantly the combination of stimulus efforts by the federal government, federal reserve, along with moratoriums against foreclosures and evictions, would support credit quality.

Then in 2021, the six banks together recorded -$21 billion in loan loss provisions, for a lift in earnings.

Looking even further back to the Great Recession and its aftermath, provisions for the group (excluding Goldman Sachs and Morgan Stanley which didn’t have loan exposure to require provisions to be made during those years) totaled $324 billion for three years through 2010.

It appears the big six aren’t very worried about credit during this economic cycle.

To support that, here are standard loan-quality and reserve ratios for the group:

Bank

Ticker

Net charge-offs/ average loans

Loan loss reserves/ total loans

Nonaccrual loans/ total loans

Loan loss reserves/ nonaccrual loans

JPMorgan Chase & Co.

JPM

0.32%

1.96%

0.59%

294%

Bank of America Corp

BAC

0.27%

1.36%

0.38%

338%

Wells Fargo & Co.

WFC

0.22%

1.43%

0.59%

231%

Morgan Stanley

MS

N/A

0.63%

N/A

N/A

Goldman Sachs Group Inc.

GS

0.40%

3.81%

N/A

N/A

Citigroup Inc.

C

0.72%

2.90%

1.07%

241%

Source: FactSet

Data notes:

  • Net charge-offs are loan losses less recoveries. This is an annualized figure. Over very long periods, charge-off ratios below 1% are generally considered to be healthy.

  • The ratio of loan loss reserves to total loans provides a useful gauge of coverage when compared with the net charge-off ratio.

  • Nonaccrual loans are those for which a bank expects to collect neither interest nor principal, but hasn’t yet charged-off. Reserve levels for all four banks with nonaccrual exposure were high as of Dec. 31.

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