• Saahil Menon

Talking Stocks: Citigroup Inc.

Some investors may frown at bank stocks in this crisis, and rightly so.

Billions have been set aside in preparation for losses, making it increasingly difficult for investors to choose which banks to hold and which ones to let go of.

Three key reasons arise as to why Citi Inc. is in the former group, and not the latter. First:

1. The bigger they are, the harder they fall

Relative to its peers, Citi stock has suffered a more precipitous fall in value: losing almost 50% whereas the industry average drop is only 37%.

Mostly, we can attribute this to the fact that the bank’s credit business is one of the largest in the global economy. While this would usually be a flourishing part of the company (with increased borrowing and higher consumer spending rates), the doom-laden outlook on incomes today would have sparked some level of fear in shareholders.

With over 30 million unemployed in the last month, a default on monthly payments is highly likely: the effect of which would be dire if the bank subsumes all the debt they were owed. The mere possibility of this would’ve lead shareholders to rapidly sell off their Citi holdings and run towards safer, more predictable investments instead. This - quite unsurprisingly - propagates a heavy drop in stock price, especially if investors flashback to Citi's meteoric fall from $500 per share to $0.97 in the last financial crisis.

However, there are several nuances that must be kept in mind before becoming overly fearful about Citi's stock today:

a) Citi have become much more responsible with spreading their risk and b) the financial sector is far more stable, with higher levels of regulation and oversight compared to 2008.

Hence, the potential upside to this stock (if prices return to $83 from the current $45 per share) seems more prevalent than the downside at the moment.

2. Diversified Portfolio

As opposed to offering only one medium of banking services, Citi‘s product portfolio is widely diversified in terms of risk: therefore helping long-term investor confidence in the company. Split between consumer and institutional services, their solutions include the following:

Figure 1: Citigroup Product Portfolio

The range of services above allow Citi to hedge their risk in the midst of different economic cycles: the effects of which are seen today as businesses attempt to fight the coronavirus pandemic.

For example, on the one hand, consumer product revenues have decreased as people scramble to save incomes and commensurately reduce disposable spending. On the other, Citi's immense trading and restructuring divisions have benefited from taking advantage of market volatility and helping clients cover their debt, respectively.

"Markets trading revenues rose sharply as we helped clients navigate extraordinary volatility...[and] we are in a very strong position from a capital, liquidity, and balance sheet perspective." - CEO Mike Corbat

The symmetric balance of risk here puts Citi in a unique position when it comes to choosing investments in such a dynamic market. This figurative "protection", along with the substantial drop in market value, further outlines their favorability as an investment for beginners.

3. Undervalued Stock

Along with the previous two points, the fact that Citi stock is fundamentally undervalued (i.e. their current stock price is too low considering their potential future cash flows) also adds to its merit as an investment.

Figure 2: Citi stock price vs Fair Value

Source: (SWS, 2020)

While we only see a ~20% undervaluation here, recent years have taught us that market dynamics can be misleading in nature: sometimes for the better, and sometimes for the worse. This means that, despite Citi's fair price sitting at $57.36, the momentum behind market upturns could cause prices to stubbornly exceed our expectations, assuming the following conditions:

Medical advances, economic reopenings as well as greater air travel would all create a more-than-proportional increase in investor confidence, in which case we could expect stocks to rally even beyond their fair values in due time.

This reinforces the idea of what we really have here: a fundamentally sound bank that has fallen almost 50% in value, along with even more plausible upside when the market turns upward.

However...Credit defaults? Possible. Some bad decisions from management? Potentially. But the fundamental advantages outlined above seem to outweigh the likelihood of these negative factors yielding any fruit.

Clearly, an attractive opening for beginner investors to pounce on.