The large international bank Citigroup (C -0.11%) has not had much to celebrate in recent years, with its stock down more than 36% over the last five years, and it's not like it was doing that well back then either.

The only good news for investors is that the bank trades at a beaten-down valuation of just 57% of its tangible book value, or net worth.

Furthermore, management does seem to have a transformation plan in place to turn the bank around and make it simpler and more profitable. That said, with the stock trading below $46 per share, let's take a look at what it would take for the stock price to double to $92 per share by 2026.

Getting into better standing with regulators

Part of Citigroup's transformation plan has to do with regulatory issues. In late 2020, federal banking regulators hit Citigroup with a $400 million fine and told the bank to fix long-standing issues with its internal controls related to compliance, data, and risk management.

Person working on multiple computer monitors.

Image source: Getty Images.

Those problems, which apparently date back years, were on full display earlier in 2020 when Citigroup accidentally wired $900 million to the wrong companies due to a manual error and out-of-date software. Citigroup has been spending heavily over the last few years to modernize the bank, with elevated expenses that are cutting into the firm's earnings. Expenses are expected to end 2022 up 7% to 8% year over year, and they will likely continue to increase next year as well.

The Wall Street Journal reported in September that federal regulators had been frustrated with Citigroup's progress on its regulatory issues two years after issuing the consent order, which isn't a great sign if true. So for Citigroup's stock price to double, management is going to have to fix these internal controls, especially related to risk management, in a much quicker fashion to get back into the good graces of regulators and ultimately slow expense growth.

It's not uncommon for these regulatory consent orders to take years, but if it's still in place in 2026, I do not think that would not be a good sign for the bank.

Executing the transformation

Aside from the regulatory issues, Citigroup has vowed to become a simpler organization focusing on higher-return businesses. Almost immediately after new CEO Jane Fraser took over the bank in early 2021, Citigroup announced its intention to sell or wind down what has now turned into 15 of its international consumer banking units, which management deemed to be inefficient and also did not have the scale to compete.

These sales, which are well underway, will free up billions of capital. But the big question in this process is when and how successful Citigroup will be at selling its international consumer banking unit in Mexico, Citibanamex. This division is highly profitable and expected to fetch a nice premium. However, the transaction is complex because this division of Citigroup is one of the largest in Mexico, so Citigroup will want to make sure this sale goes as smoothly as possible.

Once Citigroup has exited these markets, it should be able to free up the capital it needs to keep reinvesting in the business and build its regulatory capital ratios higher to meet the new regulatory capital requirements it expects in 2023 and 2024. Ideally, the sale of all of these international consumer units will make Citigroup less risky and lower the bank's regulatory capital requirements next year.

The goal of all of this is to get the bank to a point where it has enough of a capital buffer above its regulatory requirements to begin share repurchases again. With Citigroup trading at such a cheap valuation, share repurchases would help grow its tangible book value. Restarting these in 2023 could be a big catalyst for the stock.

Finally, Citigroup, at its investor day, said its medium-term financial target over the next three to five years is to generate an 11% to 12% return on tangible common equity (ROTCE). If management can hit this target in three years instead of five, I think it would send a strong signal to the market.

It's certainly possible

While it is by no means a guarantee, I do think Citigroup could double its stock by 2026 if it can accomplish its plan. I definitely think the sale of all of these international consumer units and Citibanamex will be completed well before 2026. Hitting the 11% ROTCE goal and getting the regulatory consent order removed by 2026 is more of an unknown.

But if Citigroup were to trade at $92 per share, while it would be a big deal in terms of appreciation, Citigroup still would not be trading at a demanding valuation when you consider that the bank's current tangible book value is already above $80 per share. Trading at $92 per share would still leave Citigroup at a far lower valuation than a lot of its peers, especially when you consider that the bank's tangible book value should be much higher in 2026.

However, because the bank has struggled so much in recent years, shareholders are going to be skeptical until they see more proof that the transformation is working. I definitely think Citigroup's stock price will get a good deal higher by 2026. Whether it can fully double is more dependent on how well management executes its transformation plan and deals with regulatory issues.