Citigroup Is Starting to Look Good

Hit the rewind button and go back to last year's first quarter. The U.S. Treasury had large stakes in the nation's banks, Citigroup (NYSE: C  ) traded under a buck, bank dividends had been slashed and things generally looked Ugly, with a capital U.

Fast-forward one year and the latest FDIC Quarterly Banking Profile paints a much brighter first quarter picture. Bank industry profits are up dramatically; over half the banks reported earnings growth, and most of the TARP money has been paid back.

Some other high points of the report:

  • Net interest margins at a seven year high.
  • Noncurrent loan growth slowing.
  • Capital ratio increased over 2009.

And, a few low points:

  • Loan losses still growing.
  • Total deposits fell.
  • The FDIC 'Problem List' is still growing.

Despite the low points, the FDIC report shows a much healthier banking industry compared to a year ago -- and, yes, last year was a pretty low bar. The key question for investors is whether the clearer future and improving prospects for banks make the sector a buy. To help answer that question, the FDIC data includes Return on Asset (ROA) and Return on Equity (ROE) history.

Metric

2010

2009

2006

2005

ROA

0.54%

0.16%

1.28%

1.28%

ROE

4.96%

1.66%

12.3%

12.43%

Source: FDIC First Quarter 2010 Quarterly Banking Profile. 2009 and 2010 values are annualized first quarter values; 2005 and 2006 values are for the calendar year.

This shows that even with the improvements over the past year, IF -- and that's a big if -- banks can get back to return levels of 2005 and 2006, there's still a lot of room for earnings to grow.

OK, so there's room for earnings to grow, but is that potential already priced in? Here's a quick look at some of the biggest banks to see how they stack up.

Bank

ROA

ROE

P/E Ratio
(2010 est.)

Bank of America (NYSE: BAC  )

0.2%

2.5%

15.0

Citigroup

0.1%

0.9%

11.3

JPMorgan Chase (NYSE: JPM  )

0.5%

7.1%

11.5

US Bancorp (NYSE: USB  )

0.7%

8.1%

14.5

Wells Fargo (NYSE: WFC  )

1%

11.6%

14.5

Source: Motley Fool stock quotes.

Citigroup stands out from this group. The stock trades at the lowest multiple of this year's earnings estimate and IF -- another big if -- Mr. Pandit and company can bring returns on assets and equity up to industry averages, Citi has the potential to multiply results even without revenue growth. Some of that improvement is certainly baked in to the 2010 estimates, but Citi's got some room to run.

Banking is still a tough sector that's full of risks. We don't know how European debt might impact the banks, Congress is working on financial reforms, loans are still deteriorating, unemployment is still high and there are still a lot of troubled banks out there.

Bank share prices have pulled back with the recent market slide and are starting to look reasonable. There are still plenty of risks, but Citigroup is starting to look like a good buy. And I can't believe I just wrote that.

More Banking Foolishness:

Fool contributor Russ Krull owns shares of Wells Fargo but no other stock mentioned . The Fool has a disclosure policy that we can bank on.


Read/Post Comments (11) | Recommend This Article (20)

Comments from our Foolish Readers

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  • Report this Comment On May 24, 2010, at 2:23 PM, Winyah1 wrote:

    Wiess Ratings gave Citibank a D- ratings today and suggested they and several other banks listed above are "still vulnerable to financial difficulties or even possible failure, based on its statistical analysis of each bank's capital, asset quality, earnings and other factors."

    http://www.weissratings.com/news-releases/general-2010-05-24...

  • Report this Comment On May 24, 2010, at 3:31 PM, pondee619 wrote:

    How many shares does the government still own and shouldn't we wait for the government to sell those shares before we get in?

  • Report this Comment On May 24, 2010, at 3:31 PM, pondee619 wrote:

  • Report this Comment On May 24, 2010, at 4:28 PM, kahunacfa wrote:

    CitiGroup(C), Bank of America(BAC) & JP Morgan Chase have all lookd very good since the biginning of 2010. All three are simply <b>Too Big to Fail</b>. CitiGroup in particular is headed by an excellent to outstanding Chief Executive Office Vickrum Pandit - Pandit came from the Venture Capital side of CitiGroup. He is the ideal executive to turn the company around.

    Kahuna, CFA

    Disclosure: Have a beneficial interest in all three.

  • Report this Comment On May 24, 2010, at 4:32 PM, kahunacfa wrote:

    CitiGroup(C), Bank of America(BAC) and J.P. Morgan Chase are all outstanding investments at or below current price levels.

    Kahuna, CFA

    Disclosure: Beneficial interest is all three companies. May add to current positions from time-to-time at or below the right prices.

  • Report this Comment On May 24, 2010, at 4:42 PM, topsecret09 wrote:

    Toxics are still on their books.... Billions.... TS

  • Report this Comment On May 24, 2010, at 5:09 PM, ralphmachio wrote:

    Bought C at .98, 1.03. Sold at 2.40. I am thinking C would make a GREAT short right now. I mean stupendous, giant short potential here. Anyone thinking about buying C right now is sniffing glue. It is an alright buy at .98 again, and an even better one at .50 in a few months.

  • Report this Comment On May 24, 2010, at 6:32 PM, rd80 wrote:

    @Winyah1 - Appreciate the link to Weiss' ratings. Curious that they still list Wachovia as a separate entity. Part of what makes C attractive is that it's priced for risk, but has been steadily improving results. I would agree it's not a stock for the faint of heart.

    @pondee619 - Treasury owns between 7.7 and 6.2 billion shares. Morgan Stanley is handling the sale of its stake and currently has authorization to sell up to 1.5 billion of those shares. We don't know how many have been sold yet.

    @kahunacfa - Thanks for the support :)

    @topsecret09 - yep, and those assets are steadily being written down or charged off.

    @ralphmachio - I've been known to be wrong far too often, but can't see C getting back below a buck. Time will tell.

    Thanks to all for the comments.

  • Report this Comment On May 25, 2010, at 10:55 AM, mikecart1 wrote:

    C is going to be the biggest bank by 2020. Trust me.

  • Report this Comment On May 27, 2010, at 10:20 AM, deepanalysis wrote:

    ROE may be higher than 2009 because banks have had to write off so much of their equity due to losses. Or it could be because banks are once again leveraging up their balance sheets. So ROE is just not a good guide for me.

    On the other hand, ROA is higher because net interest margin is higher. The fact that net interest margin is higher is a no brainer, they are able to borrow at near zero interest rates (because of Fed rate cuts) and put it into higher yielding assets. So, other than the Fed's actions to keep the banking system solvent, I don't buy the improving picture story.

  • Report this Comment On May 27, 2010, at 10:26 AM, deepanalysis wrote:

    "And I can't believe I just wrote that."

    Yup, I can't believe that you just told someone to invest in the stock of a company with an ROA of 0.1%. Your whole argument hinges on whether the ROA can go back to "industry standards". On the other hand if Citi's ROA stays at such depressed levels because of a whole range of business and strategy fundamentals, the stock could end up being a perennial loser. Let's also not forget the overhang of the Treasury still selling some 1.5 billion shares into the market in the coming months.

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