A number of banks have reaped gains since Donald Trump won the US presidential election last week, including Citigroup, even though this performance of soaring bank stocks has been mostly broad-based.
It may be surprising to hear that, since the shares of the US’ fourth biggest bank by assets are trailing behind its peers. KBW Bank Index, for one, had a good run of a 13% increase previously, while Citigroup’s stock climbed only at 9% in the last session. It's notable to point out that the New York-based bank is still hammering the broader market, which is up only a measly 1% over the same stretch.
But just because Citigroup has fallen behind its big-bank peers since the November 9 election results doesn't mean it will continue to underperform. There are reasons to believe it will rebound over the next year under a Trump presidency— because of the Republican’s pledged policies.
Benefits under Trump
If Donald Trump follows through on his campaign promises, Citigroup will have the most to gain in the long run. Trump’s economic policies potentially bring the prospect of a better growth environment for the megabank.
Currently, Citigroup shares trade for the lowest valuation among blue-chip bank stocks, priced at a 27% discount to book value. Meanwhile with other banks, the discount on Bank of America's shares is a more practical 18%. Both JPMorgan Chase and Wells Fargo's shares trade for premiums to their book values at 24% and 48% respectively.
More so, Trump's pledge to lower regulations on the financial industry and roll back the Dodd-Frank Act, should be mostly favorable for Citigroup. Because of regulations passed pursuant to Dodd-Frank, the megabank must currently hold more capital relative to its assets than any other bank except JPMorgan Chase. This in turn decreases the amount of leverage Citigroup can use relative to its peers, thus making the bank work even harder than its competitors to generate the type of profitability investors expect from a bank its size.
Trump has not specifically addressed that he intends to lower capital requirements on banks, but that is essentially what he meant when he stated banks aren't loaning as much as they would under a less strict regulatory environment.
Additionally, if Trump's administration removes or dials back the yearly stress tests big banks must undertake, this will also be particularly beneficial to Citigroup. Among other things, these stress tests give regulators the authority to veto big bank capital plans, such as how much they return to shareholders through dividends and stock buybacks.
Citigroup has struggled more than most banks to pacify regulators in the past on this matter. Its appeals to increase its dividend have been denied constantly over the past six years. The net result is that Citigroup pays out a smaller share of its earnings by way of dividends than any other major bank. Its payout ratio is currently only a meager 6.5%, which is half as much as Bank of America's 16%, and even less than that of JPMorgan and Wells Fargo's over 30% payout ratios.
It isn’t certain whether the stress tests or removal thereof will be affected in this way, but should it be, then Citigroup could raise its dividend faster and to a larger degree than any other big bank—ultimately stimulating its share price.
Should investors buy Citigroup?
Yes, definitely. Even though Citigroup's shares haven't soared as much since the election as opposed to other major banks, investors in Citigroup should feel confident that it's likely to make up for the differences as time passes.
Morgan Stanley even upgraded the bank to overweight from equal weight. “We are raising our EPS and Price Targets, and re-aligning our portfolio to bake in a higher forward curve and accelerating capital return post Republican sweep ... Republican Sweep is positive for all financial stocks. More growth, higher rates, less regulation, lower taxes,” wrote analyst Betsy Graseck in a note.
“We're upgrading Citi...Stock has underperformed the group post elections on concerns over a DTA [deferred tax assets] write down and tough talk on global trade. ... We don't think a DTA write down will impact Citi's strong capital return story.” The note further read.
In the last session, Citigroup stock closed with a 1.41% increase to trade at 55.42, levels last seen in December 2015. The stock is volatile as it trades within a breakout that began on November 10, after the announcement of the election results. The stock is also currently testing at 55.46, with a resistance of 53.02.
As mentioned earlier, Citigroup will be quite bullish especially in the long run under a Trump presidency, and more so should the president-elect specifically pass for higher rates and less regulations for banks.
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