Why Citigroup's Stock Is a Top Pick

Bulls Say

• Citigroup is in the middle of a strategic repositioning, making major moves such as selling off its consumer business in Mexico and reinvesting in its strong points: investment and corporate banking and wealth. Citigroup may finally emerge as a structurally improved franchise.
• Citigroup remains uniquely exposed to card loan growth and global transaction and trade volume. As card loans eventually rebound and the global economy recovers, this should drive revenue growth for the bank.
• The shares trade at less than tangible book value, not a hard hurdle to clear.

Bears Say

• Citigroup has less interest-rate sensitivity than peers and a price-sensitive deposit base, so it won’t benefit as much from a core revenue growth driver for the industry.
• Citigroup is a complex story with many moving parts. Management doesn’t expect to hit its return targets for another three to five years.
• Citigroup’s returns and revenue growth will be lower than peers’, and there remains room for negative surprises on expenses as the bank invests in regulatory and growth initiatives.

Morningstar Analyst Eric Compton Says

Citigroup (C) has large trading, investment banking, international corporate banking, and credit card operations. Its best-performing business is the Institutional Clients Group, whose commercial banking and capital markets operations have scale and a global footprint that few can replicate. In our view, this truly global presence differentiates Citi from all of its U.S.-based peers, and a wide geographical footprint should help Citigroup remain a bank of choice for companies with cross-border needs. This global presence can be expensive and complicated to maintain, and the bank’s markets desk also produces low returns, so there are weaknesses to this approach as well. Also, the bank’s sprawling consumer units have had mixed results over the years, and even in the United States, where it primarily relies on its card offerings, Citi has typically not been the most profitable player.

Citigroup is in the middle of a major strategic shift and remains a complex story. The bank is selling off multiple consumer units throughout Asia-Pacific, plans to sell its consumer unit in Mexico, and is refocusing on its core Institutional Clients Group unit, the North American consumer business, and global wealth. At the end of this process, we think the bank will be easier to understand, structurally more focused, and have a more predictable and stable return profile. However, we think Citi will still trail its peers from a profitability standpoint.

Overall, we agree with the moves the bank has been making. The Asia consumer units were not that profitable, and it’s difficult to see how the consumer unit in Mexico created any synergies for Citigroup. We don’t see material value creation by having multiple retail franchises in different countries, so while the consumer unit in Latin America was more profitable, it didn’t seem to fit easily within Citigroup.

The company has operational and regulatory issues to resolve. It also has less sensitivity to interest rates than peers, and expenses are on the rise. We see Citigroup taking some time before it better optimizes its returns.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $78
Star Rating: 5 Stars
Economic Moat Rating: None
Moat Trend Rating: Stable

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