Citigroup stock has fallen this year as the coronavirus pandemic stifles the global economy and weighs on the bank’s big multinational clients and key markets. Is there any reason to buy C stock now?
The company, the most globally-exposed of the big U.S. banks, reported third-quarter results in October that beat expectations, helped by a bump in trading even as consumer banking struggled. But a week earlier, the Federal Reserve ordered the bank to tighten up its risk management protocols in the months ahead, and executives spent a good chunk of the bank’s third-quarter earnings call trying to address the matter.
Citigroup stock is still not close to pre-pandemic levels. And it is nowhere near pre-Great-Recession heights. Below, we dive into whether Citigroup stock is worth buying right now.
Fed, OCC Crack Down
During a September conference, Citigroup CFO Mark Mason emphasized the company’s efforts since the 2008 financial crisis to simplify its business structure and focus on affluent customers and large multinationals and investors.
However, on Oct. 7, the Office of the Comptroller of the Currency fined the bank $400 million, citing Citi’s “unsound banking practices for its long-standing failure to establish effective risk management and data governance programs and internal controls.” In conjunction, the Fed issued its consent order against the bank, citing “significant ongoing deficiencies” in Citi’s risk management and internal controls.
The agency and the central bank said the problems in those areas had gone on for several years. They ordered Citigroup to take steps to improve in those and other areas.
The Fed said its most recent supervisory assessment found weakness in areas such as “data quality management and regulatory reporting, compliance risk management, capital planning, and liquidity risk management.”
The bank, during its third-quarter earnings call, acknowledged that “This won’t be a quick or easy fix.” And it said it was unable to gauge the costs of righting the ship.
During the call, an analyst asked management why the issues hadn’t been addressed sooner.
“We’ve initiated a number of significant remediation projects along the way to strengthen our controls, our infrastructure, and our governments,” CEO Michael Corbat said in response. “But that being said, we didn’t do it fast enough. And we’ve got to move faster, and that’s certainly where we’re going to be focused.”
Echoes Of Wells Fargo?
As the Wall Street Journal noted, Citigroup’s internal infrastructure is a patchwork of different systems absorbed over decades of deal-making. Still, Oppenheimer analysts advised investors to look past Wall Street’s barrage of questions.
“You cannot say ‘oh, this will cost us a billion or so, and we’ll have it done by the end of next year,'” they said in a research note.
“The Fed and the OCC will tell you when it’s done, not vice versa,” the analysts continued. “Management simply cannot say more, but basically the entire call was analysts pressing for that kind of answer which they should know management could not possibly give.”
“This is, of course, not conducive to a good stock performance on the day, but we would recommend investors keep perspective and focus on the most probable case, rather than the worst possible scenario,” he continued.
The actions against Citi wasn’t as harsh as those taken against Wells Fargo in the wake of its fake-account scandal. And the analysts noted that the case with Citigroup involved operational weaknesses, rather than “a violation of the trust of millions of customers.”
“Not all consent decrees are created equally and most are not like Wells Fargo’s,” they said.
Coronavirus Impact On C Stock
Through late February and March, C stock fell as fears over the coronavirus threatened to ripple through to the banks that loan people money and help with dealmaking.
The pandemic restricted service for businesses of all kinds, forcing them to lay off employees and scramble to pay their bills. Companies have borrowed money, tapped lines of credit and renegotiated leases with landlords in an effort to keep from folding.
The Federal Reserve has cut rates and launched open-ended quantitative easing to keep the U.S. economy going. But lower rates hurt banks’ profits, and banks have had to set aside more money as they brace losses on loans. However, in the third quarter, those reserves were significantly smaller for Citigroup.
CEO Mike Corbat will step down next February with Jane Fraser, president and the head of Citi’s global consumer banking business, succeeding him. She will become the first female CEO of a major Wall Street bank.
C Stock Fundamental Analysis
With more business concentrated outside the U.S. than its big-bank rivals, Citigroup has argued it can do a better job anticipating global changes for clients. However, that also means it’s more vulnerable to friction abroad.
The best stocks, by IBD’s standards, are capable of turning out consistent earnings growth. Before the pandemic, the last time Citigroup’s earnings declined was in 2016.
But during the first quarter of this year, they fell 44% then plunged 74% in the second quarter. In the third, they fell 32%.
For 2020, analysts expect Citigroup’s earnings to fall 44%.
Citigroup Stock Technical Analysis
Citigroup stock appeared to bottom out in April. The stock jumped in late May and early June, as economies started to reopen and May’s monthly jobs report showed surprise gains.
Shares settled into a tighter stretch of trading afterward. But the stock is not currently in any base pattern.
Shares have lost support at their 50-day line. They remain well below their 200-day line.
Citigroup’s relative strength line, which compares a stock’s performance with the S&P 500, has drifted lower since June.
Citigroup Stock Is Not A Buy, For Now
Investors should note that C stock, as with other bank stocks, rarely outperforms the market for extended periods, even when markets are stable.
The Citigroup earnings outlook is under pressure as near-zero rates squeeze net interest margins, while high unemployment hits retail and commercial lending. And for income investors, the outlook for bigger dividend payments is not encouraging as the Fed keeps a lid on bank payouts.
And the Banks-Money Center industry group, of which Citigroup stock is a member, stands at 165 out of 197 groups tracked by IBD. The stock is not in a buy zone and hasn’t formed a base pattern.
Bottom line: C stock is not a buy right now, based on IBD’s research and MarketSmith analysis.
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