Citigroup (C) is one of the biggest and most influential bellwether banks. The financial giant boasts over 200-million customers worldwide, and operates in approximately 140 countries. Citigroup shares certainly felt the wrath of the financial sector meltdown in late-2008 and early 2009, as the stock plummeted from over $20 a share to about $1 a share, and some thought that was it for Citi.
Fast forward about a year and a half and we see that Citi shares have more than quadrupled since their nadir in March 2009. So far in 2010, the stock is up over 22%, even while the market at large is down about 3% year to date. So, will Citi shares continue outpacing the market, or will the run in Citi soon come to an end? Here are five reasons why the bulls will stay in the Citi.
Citigroup earnings beat. In April, Citigroup posted impressive—and quite unexpected—earnings per share of 15 cents in the first quarter. The consensus forecast was for flat earnings. The company’s stellar earnings happened to be reported just at the time when global markets were in a nosedive, so the earnings beat wasn’t reflected in the share price. On Friday, July 16, Citi is due to report results for the second quarter. If the company can log another solid earnings beat, and if the outlook for the third quarter and for the full year are positive, the shares could really build on their already impressive 2010 run.
Citi Renews Focus on Retail Banking. Citi has been engaged in a concerted effort to ramp up its retail banking operations. Over the past couple of months, mortgage applications at its branches have jumped 60%. This includes a 30% rise in jumbo mortgages (loans larger than $729,000). The company is determined to reestablish its good name in the wake of the mortgage meltdown, and as such it has decided to concentrate on offering quality, high-net-worth customers attractive loan terms. The company now offers a 30-year fixed rate jumbo mortgage at 5%, while the competition offers the same loans at an average rate of 5.6%. If Citi becomes the go-to bank for high-end borrowers, there could be a new vein of renewed revenue flowing into the Citi.
The Bove Factor. One of the most respected names analyzing banks is Dick Bove of Rochdale Securities. The veteran analyst recently made an appearance on CNBC where he argued that Citibank is a screaming buy. Bove said Citi is his favorite company in this banking sector, and he predicted the shares would be worth $8.50 in three years. Bove says Citi must shed some of its less-than-desirable assets, including its commercial credit business, its Smith Barney holdings and its mortgage processing business, before it can really takeoff. However, he argues that the company’s international credit business, capital operations, retail banking and payment services are all poised to help Citi outperform.
Citi Has Strong Technicals. Although Citigroup shares have had a nice run in 2010, the stock took a decided turn south in April. However, the recent buying in the overall market now has pushed Citi shares back above both the 50- and 200-day moving averages. The breaching of these two technically significant trend lines is a definite positive for the stock going forward, as technical buyers view the breaking of these trend lines as a virtual green light to get back into the stock.
FinReg’s Limited Hit. There’s been a lot of fear over how far Congresses’ financial reform legislation, or finreg, will reach into bank operations. That fear has had an adverse effect on bank stocks, including Citi. But according Fox Business Network’s reporter extraordinaire Charlie Gasparino, the banks have already found the loopholes they need to help ameliorate most of the damage in the legislation—and the legislation hasn’t even been signed into law. According to Gasparino, “A consensus is forming among Wall Street chief executives that the costs of financial reform will be significantly less than originally predicted.” Gasparino also cited an anonymous source that said JP Morgan (JPM) CEO Jamie Dimon predicts “he can reduce the earnings hit to a little less than 10%.” It should come as no surprise that banks will find ways to circumnavigate any financial regulations, and the Gasparino report just confirms what most on Wall Street already suspect—new finregs will be a limited hit on banks.
We’ll soon find out how well Citigroup performed in Q2, and we’ll see what the company’s outlook is going forward. If both of these are positives, and for the other reasons stated here, we very well could see the bulls set up camp in the Citi for a very long time.
Full Disclosure: At the time of this writing, Jim Woods does not own a position in Citigroup.
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