Analysis: Citigroup (C)

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

My apologies, but it seems the software I've been relying on to track stock events is failing me.  As such, I wasn't aware of Citigroup's fourth quarter conference call until Wednesday night and wasn't able to include the pre-analysis during my weekly summary as I normally would.  Regardless, Citi announced fourth quarter and fully year 2014 financial results today.  Fourth quarter earnings came in at $0.06.  This was far below expectations of $0.09. Revenues also missed expectations with results of $17.8B vs. the expected $18.5B.  While much of this downside is related to the $3.5B in write downs for legal expenses, which were announced in December, this still felt like a difficult quarter to swallow.  Trading revenues were also down, as there was "bad volatility" as management dubbed it, which reduced the trading volume.  No doubt the dramatic decreases in Oil and the Russian Ruble were also factors, as was the declining interest rates likely an impact on their fixed income markets.  

The piece that bothered me was the decrease in book value quarter over quarter.  This decrease was taken due to unrealized losses in favor of protecting the Basel III tier of capital reserves they had, which I'm sure is to help protect their ability for the FED to approve their capital allocation plans which will be decided upon this spring.  My biggest concern, right now, is that this won't be a one time trend.  2015 has started with more downward pressure on oil and now we've seen what was once considered a "safety trade" in the Swiss Franc currency become another area of pain as the cap was removed and the currency is losing valuation.  Add this to the fact that their NIM is expected to be flat to next year (and is risking in being lower to last year based on where this year is starting), and you find concerns in the bank's ability to grow in 2015.

I cannot and will not say everything is bad for Citigroup, though.  The stock is considerably priced under it's current tangible book value - meaning the stock is worth less than all of the company's assets.  Even with a slight decline in the book value, that decline may be temporary and isn't enough to warrant this much of a discount.  This is the most discounted bank, and though it has a reason for it, there is still value here.  I do believe that the upcoming CCAR with the Fed will pose as a potential catalyst if capital allocations are approved and provide reasonable dividend and buyback offerings.  This decision should help allow the bank to be worth something closer to book value. 

Due to the concerns raised, I'm lowering my price target for 2015 to $59.  Keep in mind, this price target is also my tangible book value target, which is the unit of measure I'm using for banks for now (earnings seem much harder to estimate with all of the unknown legal actions).  Until I feel more comfortable that Tangible Book Value is no longer decreasing, I can't have a target as high as it was.  Despite my lower target, the stock has dropped dramatically from where it was in rather short order, and as such, am not changing the stock's rank.  Please note, I almost raised the rank to a 1, but the technical evidence is currently showing room for a short term bounce, but it's not necessarily done going down.  It feels that the floor is in the $45 - 47 range, so that's what needs to be watched over the next week or two.