Given its recent troubles, Citigroup Inc (C) stock had a pretty good 2014, ending up 3.52%. But this was a far cry from the S&P 500’s return of over 12% and the lowest return of all the money center banks last year.
Citigroup’s absence at the party may be poised to change in 2015.
Continued Pain from Financial Crisis Fallout
Citigroup stock lagged the market in 2014 because it has been unable to shake off trouble due to past sins. Early in 2014 Citigroup failed the Federal Reserve stress test for the second time in a row due to its inability to effectively demonstrate that it had sufficient capital to manage severely stressed economic conditions. This failure prevented Citigroup from executing a planned stock buyback and dividend increase.
In addition to the stress test failure, Citigroup has experienced weakness in international markets throughout 2014. Lacking the ability to follow through on investor friendly initiatives coupled with weakness overseas has resulted in Citigroup stock failing to perform well against its peers.
Will 2015 be Better?
It is certainly looking that way. No one purposely tries to fail such a critical exam such as the Federal Reserve stress test. Failing it twice not only ties the banks hands, but also is a huge black eye on management.
Citigroup’s CEO, Michael Corbat has made it clear through various interviews that he does not intend to let this happened for a third time. In support of this effort, Citigroup has divested international assets and has kept constant communication lines open with Federal Reserve officials to ensure that any changes that are made are noted and in the direction that the Federal Reserve is looking to see.
The pressure to pass the next stress test is warranted. If Citigroup fails to pass a third time there will be significant discussions among Federal regulators about whether Citigroup has become too big to manage as a single entity and may need to be broken up. This would be a huge slap in the face for the financial supermarket that Sandy Weill built. Although not officially reviewed by the Federal Reserve, Citigroup’s mid-year 2014 stress test in which it used its own economic scenarios appears to be more in line with Federal Reserve guidance.
Citigroup will post earnings on Jan. 15. But the more important catalyst for the stock will come later in the spring of 2015 when the Federal Reserve will do another stress test on Citigroup and release results. I expect Citigroup to pass and when it passes, it will most likely execute on its plans for a $6.4 billion stock buyback program and increase its dividend to at least 5 cents a share, which is still anemic, but a positive sign. These moves should propel the stock.
Citigroup Looks Cheap
Citigroup is now at about $51 a share. It has a price-to earnings (P/E) ratio of 17.45, price-to-book of 0.77 and price-to-tangible book of 0.84. The S&P 500’s P/E ratio is just over 18 now and any financial stock that trades below a price-to-book ratio of 1 has room to grow.
Consensus estimates are for a Citigroup stock price target of $60.12, an 18% premium to its current trading range. Citigroup’s forward P/E is just over 9, indicating that analysts are expecting higher earnings to drive the stock price next year, not just multiple increases.
Citigroup looks cheap given its potential to increase earnings in 2015 and likely ability to initiate several investor friendly initiatives once it passes the Federal Reserve stress test by mid-year. With improving economic conditions in the United States, a steepening yield curve that should help asset yields and fewer delinquencies, Citigroup stock looks to have a strong 2015 ahead.