Citigroup (NYSE:C) has long provided conservative investors a sense of stability reflected in its Blue-chip status. However, the pandemic has placed extraordinary stresses on the banking sector as interest rates hover at very low levels making C stock look a little chancy.
Thus, investors want to know if Citigroup shares can maintain that stability and if there is a path upward price-wise. The company’s Q2 earnings told a story that provided neither a clearly bullish narrative, nor a bearish one.
Yet despite Citigroup’s unwieldy size making it difficult to respond to abrupt market externalities it is a stock to consider.
Earnings Indicate Flatness for C Stock
Citigroup’s second-quarter earnings were neither dismal nor excellent. The company reported numbers which weren’t as impressive as JPMorgan’s (NYSE:JPM) but fared better than Wells Fargo’s (NYSE:WFC). Markets of course need more than a simple comparison of competitors in order to reward a stock.
Fortunately for C stock there was good news to be taken from their earnings report. A few positive notes:
- Revenues increased 5% over Q2 2019 to $19.8 billion.
- Institutional Clients Group revenues rose 21% year-over-year
And the company is taking a conservative approach to mitigate risk in these unprecedented circumstances. Citi CEO Michael Corbat stated:
“We entered this crisis from a position of strength. During the quarter, our regulatory capital increased and our CET1 ratio improved to 11.5%, comfortably above our new regulatory minimum of 10%. We continued to add to our substantial levels of liquidity and our balance sheet has plenty of capacity to serve our clients. With a sharp emphasis on risk management, we are prepared for a variety of scenarios and will continue to operate our institution prudently given this unprecedented situation,”
Further, Citigroup has undertaken a reserve build to buttress it against ongoing risk due to the pandemic.
But this was balanced by a few less than positive notes:
- Net income dropped 73% year-over-year.
- EPS of 50 cents represented a 74% decrease from Q2 2019.
Citi’s reserve build is positive from a risk management perspective. However, it is also a clear indication that banks are expecting more coronavirus woes.
Bank Profits Will Remain Low
Banks are expecting a wave of credit defaults to affect them as the effects of the pandemic are digested. Bank management is setting aside massive pools of capital to lessen those effects.
Profits are directly affected as Banks do so. Investors can expect that share prices of bank stocks will remain low as long as such precautionary efforts are taken. Optimistic investors may also see this as a reason to purchase shares now.
As soon as pandemic risks are controlled those reserve levels will be decreased. Shares of C stock should rise quickly when that happens.
Citigroup management must also consider its lending strategy after Covid-19. Consumer and business lending provided large profits to banks as consumers and businesses looked to capitalize on low interest rates following the last financial crisis. But the wake of this crisis may look different. Bank lending could vary significantly this time around.
There is no guarantee that consumers and businesses will be as eager to take on loans with the same volume they did following the last financial crisis.
Citigroup Shares Should Remain Stable
Citi has been a vaunted Blue-chip stock for a long time. Investors generally expect it to remain stable in times of trouble the company looks to be weathering this storm quite well.
Despite the negative overtones within this article there may be a bull thesis for Citigroup shares. Yes, earnings per share and net income did decrease significantly. The company is also directing capital towards loss provisions which drops profits. News of a vaccine is still murky. And the economy is in a bad state.
Solid Despite Its Environment
Citigroup is a stock which can be had at a low price right now. All of those bad signs are baked into C share prices and there is lots of potential for the price to rise. Investors should expect that buying Citigroup stock and holding on to it for a few years should return nice gains. Additionally, the dividend income from shares will continue to entice investors.
I think those investors considering a bank play which will rise as America overcomes the pandemic could do much worse than Citigroup. Investor trepidation may also be assuaged by the fact that analysts mostly rate C stock a buy, and at worst a hold. But as a buy-and-hold stock, Citigroup looks to be a solid play right now.
At the time of this writing, Alex Sirois did not hold shares of any of the aforementioned stocks.