It's been a dreadful year for Citigroup (C -1.81%) in terms of stock price performance, with shares of the megabank down about 1% this year. The KBW Nasdaq Bank Index, which tracks large bank stocks, is up nearly 35% this year, showing just how much Citigroup has lagged the broader sector. Trading at beaten-down levels, can Citigroup turn it around in 2022? Let's take a look.

What led to poor performance in 2021

Citigroup came into 2021 facing several challenges. The bank, which has lagged its peers since the Great Recession, got into trouble in 2020 when it accidentally sent $900 million to the wrong parties due to a clerical error, which showed the lack of modernization at the bank. Later in the year, regulators hit Citigroup with a $400 million fine and a cease-and-desist order, tasking management with fixing long-standing deficiencies related to internal controls regarding compliance, data, and risk management. Citigroup's CEO at the time, Michael Corbat, also announced his retirement in 2020, surprising many who thought he had a few years left to go.

Person looking out at horizon as sun comes up.

Image source: Getty Images.

In early 2021, Jane Fraser took the reins of Citigroup and set out to refresh the bank's strategy. She got off to a promising start, announcing a big shift in the bank's global strategy in which the bank will sell or exit 13 global franchises that lack the scale to compete. As part of the refresh, Fraser also said Citigroup would further invest in businesses within the franchise that already put up good returns and focus on capital-light businesses like wealth management, particularly in Citigroup's international footprint. 

Investors seemed pleased with the initial steps, but Fraser's honeymoon quickly soured in the second half of the year, as expenses at the bank rose and market conditions got tougher. The bank sold its Australia consumer banking division and took a $680 million pre-tax loss in Q3. Then Citigroup announced that it would wind down its Korean consumer division, which could result in a charge for as much as $1.5 billion. The sales free up capital, and I don't know if it would have made sense for Citigroup to necessarily wait on these moves, but I also don't think it's what investors were anticipating.

Another big disappointment came recently when Citigroup CFO Mark Mason revealed at a recent conference that the bank had paused share repurchases this quarter due to a new capital rule from regulators that required some banks to increase risk-weighted assets and therefore hold more capital. This was particularly disappointing because Citigroup is now trading below $60 per share, at a measly 75% of tangible book value (TBV), which is what a bank would be worth if it were to be liquidated. At these levels, repurchasing stock would grow TBV, which banks trade relative to, so a higher TBV typically benefits bank stocks in the long term. This is a rare opportunity that Citigroup should be taking advantage of by repurchasing as many shares as possible while still investing in the business.

Can the bank rebound?

I really don't understand Citigroup trading at these beaten-down levels and don't know how much lower it can go (famous last words). I believe the beaten-down share price is a reflection of the market's frustration with this stock over the years, but Citigroup has one of the world's strongest investment banking divisions and has amassed 4% of the total U.S. deposit market share. These are moats that are not easy to replicate and should be worth more than Citigroup's current valuation. To be sure, the bank has plenty of work to do, including modernizing its infrastructure to address the consent order from regulators.

Still, management has given us the shell of a transformation plan that looks promising. Citigroup is planning to sell inefficient businesses within its sprawling franchise and double down on businesses like treasury and trade solutions that are capable of generating outstanding returns. The wealth management angle looks promising as well because Citigroup already has such a big international presence. 

Mason said that share repurchases would resume in the first quarter of 2022, and those have already helped grow Citigroup's TBV per share to $79. At its current price of roughly $59 per share, that implies 34% upside just to get back to TBV, which is half the value of competitors like JPMorgan Chase and Bank of America. While the transformation plan is happening, Citigroup can repurchase shares and continue to meaningfully grow TBV. At its current price, the bank's dividend yield is more than 3.4%, so it's not as though investors aren't being rewarded for their patience.

What will happen in 2022

Citigroup's transformation is likely a multi-year effort, but the bank is holding an investor day in March. That should give investors and analysts a more detailed view of the strategy refresh, as well as some renewed faith in management. Potential interest rate hikes next year could benefit the bank modestly, but I think share repurchases, the investor day, and executing on its transformation are more important. Ultimately, I'm hopeful that Citigroup's stock will be able to get back to 100% of TBV in 2022, which would be about $80 per share and represent some significant upside.