Like bargain stocks? There are certainly plenty of them out there now. That's particularly true among banking names. Between general economic malaise and a souring lending environment, investors are anything but stoked about owning finance sector tickers.
There's one bank stock, however, that's strangely far out of favor -- Citigroup (C 2.11%). Its price-to-earnings and price-to-book ratios are about as low as they've been in years.
Veteran investors know there's usually a reason a stock is uniquely cheap -- it's often a sign of big problems. And there's no denying Citigroup's got 'em. On the other hand, the sellers are arguably overshooting their target at a time when Citi's nearing a turnaround.
Citigroup is undergoing long-overdue change
With nothing more than a passing glance, Citigroup doesn't look too different than familiar rivals like Bank of America (BAC 1.35%) and Wells Fargo (WFC 0.83%). They all offer consumer banking services like checking accounts and credit cards, and they all also offer institutional services like wealth management and investment banking.
But there are important differences you won't see immediately. Namely, whereas BofA and Wells Fargo each operate a few thousand U.S. branches, Citi only mans a few hundred. That's not to say Citi doesn't have a great consumer presence -- it does. It just has it outside of the United States.
That's something of a sore spot for the stock too, since these brick-and-mortar banks don't add a lot of value to the entirety of the company itself. And that's why relatively new CEO Jane Fraser is shedding many of these branches.
It's not been completely smooth sailing thus far. The company's plans to sell Mexico's Banamex, for instance, fell through last month. Now it's going to spin off this operation via a public offering, which is not only more complicated, but also doesn't secure a guaranteed price.
Think bigger picture though. A willingness to find another way to shed misfit pieces of the company is some of the boldest thinking investors have seen from Citi in some time. And its overseas consumer-facing business isn't the only one being rethought. Fraser is also looking to expand Citi's lucrative wealth management operation, while its bond and trading business continues to thrive. Moreover, in April Fraser commented at Citi's annual shareholders meeting that she envisions the company being "the preeminent banking partner for institutions with cross-border needs."
The kicker: Fraser's revamping Citigroup's corporate culture too. She aims to become the "bank with a soul," with the ultimate aim of providing a fair work/life balance for workers that might otherwise avoid or abandon the banking business.
Her vision is slowly but surely gaining steam.
Low valuations (probably) don't reflect the plausible future
While Citi and Fraser may be making inroads on the investor confidence front, it's not yet showing up in the stock's price. As of the most recent look, shares trade at a mere 6.7 times their trailing-12-month earnings. That's about as low as the stock's P/E ratio has been in years.
C P/E Ratio data by YCharts
It's not like that ultra-low valuation is a fluke prompted by a one-time accounting quirk either. Shares are priced at only 7.6 times this year's expected profits, and valued at only 7.5 times next year's likely per-share earnings. Those are also strangely low forward-looking price measures.
Its price-to-book value of just under 0.5 is also near a multi-year low. That's one of the lowest among all the major banking names, in fact. For perspective, Bank of America's current P/B ratio is nearly 1.0. Wells Fargo's stands at just under 1.0 as well.
What gives? Blame Citi's tepid returns on its overall assets, mostly.
Last quarter's return on total shareholder equity (assets minus liabilities), or ROE, was a modest 9.5%. BofA's is a healthier 12.5%. Wells Fargo's Q1 ROE is better at 11.7%. And a comparison of slightly more meaningful returns on total common stock equity (or ROTCE) doesn't help much either. Citigroup's Q1 ROTCE of 10.9% is below Wells Fargo's 14% and Bank of America's 17.4%.
The disparate numbers indicate that Citi just isn't getting as much bang for its tied-up buck as most other banks are. That's the crux of the reason shares command a lower earnings-based price premium than BofA or Wells Fargo stock.
The underpinnings of those lackluster ROE and ROTCE figures, however, are also highly subject to improvement under Fraser's turnaround plan.
See, overseas consumer banking offers reliable cash flow. It's a low-growth, low-margin business, though, particularly when it lacks scale -- as much of this business did (and still does). Meanwhile, payments -- both consumer and corporate -- are a huge opportunity that hasn't yet been fully tapped. Indeed, earlier this year Bank of England executive director Victoria Cleland suggested the cross-border payments market Citi is hoping to further penetrate could facilitate $250 trillion worth of payments in 2027, well up from 2017's $150 trillion.
Fraser certainly seems to have her finger on the pulse of where future growth is and isn't.
To buy, or not to buy?
Is the turnaround/reshaping effort going to work? That's the real question here.
Citigroup stock's oddly low valuation is curious. But it's only compelling if the prescribed changes, like shedding the rest of its overseas consumer banks, growth of its domestic market share, growth of its wealth management operation, and a deeper penetration of the cross-border market, become a reality. We're seeing glimmers of hope in this regard, but that progress is now being obscured by a generally tepid economy, and a weakening lending market in particular. That's why most investors may only want to put the stock on their long-term watchlist right now.
C Revenue (Quarterly) data by YCharts
For more speculative and income-minded investors, though, there's still a case to be made for taking a swing on Citi shares while the dividend yield is an industry-topping 4.4%. The company's still turning a respectable profit in the meantime, and there's still plenty of it to fund the stock's current per-share dividend of $0.51.
Just be sure you can stomach the volatility likely to continue into the foreseeable future as the rest of the market is getting a handle on the revamp.
