Research by Dr. Thanh Bui, Chief Fundamental Analyst
Edited by Jeff Camarda, Chief Investment Officer
Citigroup Inc. (C) is a financial services holding company providing financial products and services, including consumer banking, credit cards, corporate and investment banking, securities brokerage, and wealth management. Key positive points are:
- The company’s global presence differentiates it from other big U.S. banks. Currently, the company has 3,280 branches in 35 countries. A large percentage of its total revenue comes from Asia and Latin America, and the bank seems poised to participate in the anticipated growth of these economies over the coming decade. These markets offer an attractive combination of high margins and rapid credit growth in the context of forecasted continuing low rates and declining leverage in the U.S. and other Western economies for the next few years.
- Over the past five years, Citigroup has improved by raising new capital, reorganizing its assets, and strengthening its board of directors and management team. In addition, the company’s management is attempting to optimize operations and cut expenses, such as by consolidating back-office functions and concentrating its branch network in key international markets, including Brazil and Hong Kong. Recently, it sold its Japanese consumer operations—a segment with slow growth prospects—in a move reflecting management’s strategy to concentrate on profitable and promising business lines.
- Citigroup’s balance sheet seems solid. In the first quarter of 2016 year, the company met the common equity Tier 1 ratio requirement (i.e. Tier 1 capital/risk-weighted assets) as required regulation Basel III (minimum is 6%, the bank data is 11%). Recently, the company has resolved many of its exposures to litigation, which has been a significant stumbling block for investors. Per the company’s recent reports, there is no category of loan or securities accounting for more than 200% of its tangible common equity, which is a good thing.
- The interest income (core business) and operating income of the company are up-trending over the last four years with high growth in 2015. Loans made up 34% of its total assets as of September 30th, 2015.
- Cash flow is strong. Its free cash flow has been growing fast and now accounts for 29.5% of the company’s market value. It has been increasing the dividend payment over the past five years.
- The company enjoyed high profitability versus its industry and companies in general with a very respectable net profit margin of 17.8% versus the market level of 13.3%.
- It has been recently trading at attractive “bargain” levels with a P/E of 9.3, P/B of 0.8, and PEG of 0.4. Its EV/EBITDA is 9.03.
- Overall Opinion: attractive valuation, strong financial position, a strong and-improving effort from management, and good growth potential. We rate it a strong BUY.
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