The multinational financial services group Citigroup (C) is best known as the parent company of Citibank. This bank has a long and rich history, having been founded in 1812 as the City Bank of New York, and later becoming First National City Bank of New York.

But in recent decades, it has become the one bank stock that Wall Street dislikes and that, as a result, gets kicked around.

However, that may be about to change…

Citi Is Too Cheap

Since taking the helm at Citigroup in March 2021, CEO Jane Fraser has cut jobs and ditched retail banking operations in 14 overseas markets. In September 2023, she announced an even bigger shake-up, aimed at stripping away the layers of bureaucracy that have made the third-largest bank by deposits so unwieldy.

Currently, Citi’s price to tangible book value ratio—at just 0.6x—is the lowest among the largest U.S. banks. This reflects Citi’s dismal long-term return on tangible common equity.

This closely watched number came in at 7.7% in the most recent quarter, well below the 22% reported by Wall Street’s favorite bank, JPMorgan (JPM). It also shows that Citi has a lot of work to do to hit its own medium-term target of achieving an 11% to 12% return on tangible equity (ROTE) by 2027.

The so-called valuation wizard, Aswath Damodaran of New York University, has made a strong case for owning Citi. He wrote that Citi had ample regulatory capital and has been growing assets slowly but steadily. He believes this means net income will grow over time.

In order to assess the riskiness of Citi, he looked at net interest margin, regulatory capital ratios, dividend yield, return on equity, deposit growth and securities portfolio accounting at the 25 largest U.S. banks.

Citi actually scored above the median on the first three of these six measures—the best performance among banks that trade at a price/book discount. However, Citi’s weakest link remains the aforementioned return on tangible equity.

Damodaran goes on to say the discount on Citi’s stock is too much. He says that Citi’s banking business, while slow-growing, remains lucrative.

While few in number, Damodaran is not Citi’s only fan.

Citi Stock to Double?

Another big fan is Wall Street’s most well-known bank analyst, Mike Mayo of Wells Fargo.

He had already named Citi his top pick among big bank stocks for 2024, replacing JPMorgan as his favorite. But now, he has taken it even further by saying he expects shares to more than double over the next three years as the bank undergoes a “metamorphosis.”

Mayo’s base case is for the stock to rise to about $119 through 2026, which would translate to a 131% advance from where it ended 2023. He also raised his one-year price target from $60 a share to $70 a share.

“Investors repeatedly tell us—‘Don’t talk to me about Citigroup!’” Mayo wrote in a note dated January 1. “To us, this negative sentiment creates a more favorable setup for a potential double in the stock over three years.”

Mayo is making a definite contrarian bet on Citi. Consider that Citi stock has quickly gotten queasy the handful of times it has crossed $70 for the past decade.

And it hasn’t even gotten vaguely close to $100 for 16 years. If Citi shares do crack the $100-per-share level, that would mark its highest level since 2008.

I do find myself in agreement with Mayo though when he said, “Citigroup is becoming a much more simple and profitable firm, whose earnings should double over the next three years.”

He lays out the case for Citi: “Citi’s de-risking seems at least partly shown by the best-in-class performance of its bonds during 2023, which now trade in line with the other big six banks and better than regionals. Citi also avoided the big issues of 2023, after failures of regional banks and Credit Suisse, and has about the lowest exposure to CRE (commercial real estate)/office.”

Mayo also points out that Citi has increased its book value in recent years, even though the stock declined. “Since year-end 2019, TBV (tangible book value) increased from $70 to $87 as of 3Q23 (with a further increase to an estimated $113 in 2026), while Citi stock declined from $80 to $51 as of December 29, 2023.”

Buy Citi

Mayo forecasts that buybacks will reduce share count by about 20%. And “Citi will likely have excess capital over three years equal to half its current market cap.”

Finally, he says dividends will provide an extra 10%+ return. This is based on an estimated $12 billion of cumulative dividends over 3 years on a market capitalization of about $100 billion. At the moment, Citi’s yield is nearly 4%, with $0.53-per-share quarterly payouts.

Citi looks like a solid buy from here anywhere below $55.

— Tony Daltorio

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Source: Investors Alley