Earnings Analysis: Citigroup (C)

Notes:
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.

Back on Wednesday, Citigroup reported their fourt quarter and fiscal year 2016 earnings results.  The company earned $1.14 per share on $17B in revenues which I find to be about in line with the $1.12 earnings and $17.3B revenues expectations from the analyst community.  Throughout the year, Citigroup returned $11B to the shareholder in the forms of dividends and buybacks.  In regards to buybacks, Citi bought back 181M shares resulting in a 6% reduction in share count on the year.  All of this resulted in a Tangible Book Value of $64.57, which was a 7% increase year over year, however it was a decline of 0.2% sequentially from the third quarter.  

Diving a little deeper into the results also gives me a mixed feeling.  Annual revenues were down 8% from last year, though much of that was due to continued sales from the Citi Holdings portfolio, which, while making profits for the last 10 quarters, isn't part of their core and has had a history of providing large losses.  They also lost $267M in FX translation which is higher than anticipated due to the excessively weakened Peso in Mexico and overall strength of the US Dollar.  Citigroup has, by far, the largest international exposure and therefore will be impacted the most by the strong dollar.  This impact is, actually, a little bit of a concern to me as it could cause the bank to be seen as an underperformer.  That said, we are also starting to see strength from other parts of the world as well.  If this continues, it is likely to bode well for Citi. Strength from their trading and credit cards were both strong and positive looking.  The card's North American growth of 15% was buoyed by  
Finally is the elephant.  Net Interest Margin both for the quarter and the year were down both sequentially and year over year despite the fact that the Fed raised rates a quarter percent over a year ago.  They also raised it another quarter point, but that was half way through December, so I'm not going to count that much.  Something about this just didn't make sense and I'm still puzzled.  This is supposed to be where the banks are suppose to start making their money, yet their NIM went down on what was reported as "lower trading NIM, higher funding costs, and the higher mix of promotional rate in cards."  They also guided to a flat 2.86% NIM for 2017, although it's extremely important to note that management was likely being excessively conservative on their estimations, as they did not factor in any further rate hikes, while analysts expect two or three.  This does set them up nicely for an under promise and over deliver scenario at best, and hopefully in line expectations if things really do get worse.  

All in all, I wish all the more right now that I followed my gut and sold my gains to buy them back later.  I foresee the stock getting down to around $54 before it starts seeing decent support again.  The banks ran too hot and expectations were too high in the short term.  I expect them to trade more in line with the 10 year Treasury again for awhile.  Further rate hikes from the Fed along with actions from the new administration regarding regulations and taxation are the catalysts everyone is looking for.  I also believe Citi will fare well in the next CCAR and be able to increase their return to investors, which could help the price increase.  Based on the results and the conservative guidance from management, I feel I should act accordingly for now.  I'm going to anticipate 5%-5.5% growth in the TBV for 2017, resulting in a TBV target of $68.  With the company still selling at a discount to TBV, I'll maintain a 1x multiple and set my 2017 price target at $68 as well.  

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.