Citigroup (C) is an American multinational financial services provider. The firm generates the bulk of its revenue from interest-bearing activities, but also provides high-quality investment banking, fee-based asset management, and other solutions to consumers and corporations.
I am bearish on the stock. (See Analysts’ Top Stocks on TipRanks)
Share Buyback Program Halted
Citigroup has halted its share buyback program due to a new capital rule related to derivatives risk. The new rule will likely increase Citi’s risk-weighted assets by $60 billion to $65 billion, and dent the CET1 ratio by 50 to 60 basis points. This event is a massive blow to the bank as the news comes on the back of an 11.7% drawdown of its CET 1 ratio during Q3.
If Citi commits more capital to less risky assets, we’re likely to see less top-line growth and lower future shareholder compensation. In addition, this quarter’s reduced stock repurchases will diminish the market’s expected intrinsic value of the stock, which could cause a minor sell-off.
Earnings Stagnation and Restructuring Costs
The bank’s Consumer revenue is anticipated to recover in Q4, but drop year-over-year due to dispositions. I believe that earnings from this division will improve in 2022 with higher yields on debt, but there will most likely be a trade-off with declining growth in other segments.
We’ve already witnessed a slowdown in treasury and trade solutions year-over-year (-4%), and I can’t possibly see how year-over-year growth numbers in investment banking (+39%) and equity markets (+40%) will be ascertained amid a stock market cooldown.
Furthermore, Citi’s in the process of a major restructuring. The bank is headed in another direction with new CEO Jane Fraser, emphasizing fee-based business instead of consumer banking.
However, this could be a costly process; the bank is set to spend $1.2 billion to divest assets in Asia and an undisclosed amount to exit its consumer lending business in South America.
The repercussions of this would be a damaged balance sheet and a load of large one-off costs deteriorating the firm’s income statement.
Struggling for Momentum
Citi stock s trading below its 10-, 50-, 100-, and 200-day moving averages indicating that the stock’s struggling to find momentum despite the “rate-hike” cyclical rhetoric in the air.
Although there’s an argument that the stock could be set for a reversal with its RSI at 26, there’s no real volume in the stock’s trading. I think we’re set for a slow decline in Citi’s stock price during 2022.
Wall Street’s Take
Wall Street analysts are generally bullish on the stock, with a Moderate Buy rating assigned, based on six Buys and three Holds. The average Citigroup price target on the street is $80.56, which presents a value upside worth 32.6%.
Concluding Thoughts
I don’t see upside ahead for Citi stock amid a range of headwinds. Adding to restructuring costs are the firm’s issues with its risk-weighted assets, which have a damaging effect on shareholder compensation.
The stock has also failed to gather momentum during a period where some financial stocks have actually performed well. I think 2022 will be a rough year for the stock.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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