Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Citigroup's Profit Target is Dead

Following three consecutive days of losses, U.S. stocks are little changed on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  down 0.02% and 0.13%, respectively, at 10:15 a.m. EDT. Investors will (again) be paying close attention to technology stocks and momentum names, as the Nasdaq Composite has just lost 4.6% in its worst three-day stretch since August 2011. As I highlighted yesterday, there appears to be a correction under way for high-flying names, particularly in the social networking and biotechnology sectors. Gven the froth that had developed in these areas, the correction could certainly continue. As far as company-specific news is concerned, banking major Citigroup (NYSE: C  ) is on the market's radar this morning as it owns up to some hard truths.

Last week, I highlighted that Citigroup's goal for 2015 of a 10% return on tangible common equity was in jeopardy as a result of the Federal Reserve's rejection of its capital return program. [Quick primer: With Citi now forced to retain higher amounts of capital than expected, tangible common equity -- the denominator in the return ratio -- will be higher than anticipated, raising the bar for profits required to hit the 10% target.] This is common sense, but Citi has not commented on the matter publicly. However, yesterday, The Wall Street Journal reported that the bank has been privately warning investors that it may well miss its target.

The capital return program the Fed rejected called for an increase in Citi's share repurchase program from $1.2 billion to $6.4 billion -- the difference is not insignificant relative to Citigroup's tangible book value of $167.5 billion. Last year, Citi achieved a return on tangible common equity of 8.2%, up from 7.9% in 2012.

The good news is that, according to the Journal article, Citigroup has told investors it expects to meet other targets, including return on assets and efficiency ratio. These are better indicators of managerial and operating performance as they don't depend on leverage. In the same March 2013 presentation in which CEO Michael Corbat established the 10% return on tangible common equity, he also aimed for a return on assets between 0.9% and 1.1% and an efficiency ratio on core assets in the mid-50% range (the efficiency ratio relates noninterest expenses to revenue).

The Fed's snub of Citigroup is a setback to its turnaround, which has an impact on the bank's ability to reach a high-profile profitability target. However, it looks like this will translate into no more than a one-year delay for the capital return calendar -- that doesn't look like it deserves a 16% decline in the stock from its 52-week high (compared to roughly 5% for the KBW Bank Index). At a 16% discount to its tangible book value and less than 10 times next 12 months' earnings-per-share estimate, I continue to think Citi offers decent value -- something that isn't easy to find in the current market.

Beyond Citi: Big banking's little $20.8 trillion secret (psst -- it's investable!)
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2906807, ~/Articles/ArticleHandler.aspx, 9/2/2015 6:55:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:35 PM
^DJI $16058.35 Down -469.68 -2.84%
C $50.94 Down -2.54 -4.75%
Citigroup Inc CAPS Rating: ***