Citi’s Earnings Were Weak, But the Valuation of C Stock Is Attractive

On Apr. 15, Citigroup (NYSE:C) reported its first-quarter earnings, providing a glimpse of the initial impact of the novel coronavirus on its business. The  results were fairly bleak, leading to a decline of nearly 6% by C stock on Apr. 15.

Source: TungCheung /

And although the shares subsequently rallied, they are still well below their 52-week high of $83.

Let’s take a look at the Q1 results. While Citi’s revenue actually increased by an impressive 12% year-over-year to $20.73 billion, its bottom line tumbled 46% YOY. Its revenue and earnings per share came in at $2.52 billion and $1.05, respectively. Analysts, on average, had expected EPS of $1.07.

Not surprisingly, Citigroup’s trading business did show considerable strength. That also the case for other huge financial institutions like JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS).

In Q1, the revenue of Citigroup’s trading business spiked 39% YOY .
One key to Citigroup’s trading success was that it  did not have much portfolio exposure. Instead, the firm was able to benefit from huge trading volumes and wide bid-ask spreads.

But the markets’ volatility will start to trail off going forward, so the growth of Citi’s trading revenues is likely to be temporary.

Other Parts of The Business

Unfortunately, most of the rest of Citigroup is vulnerable.  First of all, after the Fed’s aggressive actions, interest rates are at rock-bottom levels. That will create further pressure on Citi’s net interest margin, which is the difference between the interest a bank charges its customers and the rate it pays for deposits.

Next, as the global economy quickly sinks into a recession, the bank’s fee income will drop. That phenomenon has already affected  its credit card business.

Yet the biggest issue for C stock is the risk of defaults. The number of bankruptcies and restructurings in some sectors, such as energy, entertainment and travel, will likely surge. In anticipation of this, Citigroup  set aside close to $5 billion on its balance sheet in Q1. In the previous quarter, it only set aside $278 million for defaults.

However, it is not clear if Citi’s $5 billion of additional reserves  will be enough. Let’s face it: the modern economy has never been intentionally shut down before. It’s unclear exactly how long the shutdown will last and whether there will be a strong recovery when things open up.

Here’s what Citigroup CEO Michael Corbat had to say about that on the earnings call: “While we’ve built significant loan loss reserves, no one knows what the severity or longevity of the virus’s impact on the global economy will be. That said, we entered this crisis in a very strong position from a capital, liquidity and balance sheet perspective. We have the resources we need to serve our clients without jeopardizing our safety and soundness.”

The Bottom Line on C Stock

It really is tough to gauge the outlook of C stock right now. But some things are clear. One is that Corbat has done a pretty good job navigating this challenging environment.

What’s more, the valuation of C stock is really cheap. After all, the shares are trading at a 40% discount to the bank’s tangible book value. Oh, and the stock’s dividend yield is an attractive 5%.

So while it is impossible to know whether the stock has bottomed in these uncertain times,  the shares do look attractive right now for long-term investors.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.  As of this writing, he did not hold a position in any of the aforementioned securities.

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