Citigroup's (NYSE:C) stock hasn't done much for shareholders this year. Though the stock has been fluctuating quite a bit in 2014, a net gain for investors who bought at the beginning of the year hasn't come around yet: The stock is down about 2%.
However, giving up now might be a mistake. Citigroup's settlement with the Department of Justice over shoddy mortgages in July could clear the way for higher share prices in the years ahead. Further, cyclical tailwinds from the economy and an uptick in trading revenues in a period of more volatile capital markets could also give Citigroup's shares a boost.
For much of the year, Citigroup shares have traded in a range of $46 to $50, with few impulses that could have ignited a share-price rally. Citigroup's first- and second quarter results also highlighted that large banks still face a difficult operating environment.
In the second quarter of 2014, Citigroup showed continued revenue weakness, with sequential revenue growth coming in at minus-4%, while year-over-year revenue fell 3%. Citigroup's third quarter results, on the other hand, saw a slight reversal in revenue momentum and a 3% uptick in sequential revenues to $20 billion.
Citigroup's revenues came under pressure for a variety of reasons in 2014: First, its North American Consumer Banking segment posted 26% lower retail banking revenue year over year in the second quarter because of lower mortgage refinancing activity. While the second quarter highlighted a very poor Consumer Banking performance, Citigroup benefited from some volume growth in the third quarter: Retail banking revenues increased 5% quarter over quarter and 9% year over year to $1.2 billion.
Second, revenue from Citigroup's Total Markets and Securities Services segment, including revenue from trading, fell 16% year over year to $4.1 billion in 2Q 2014, driven by low market volatility and client activity in its Fixed Income and Equity Market segments.
The Total Markets and Securities Services segment produces revenues that are inherently difficult to forecast as they are highly correlated to the overall state and volatility of the debt and equity markets. In the third quarter of 2014, for instance, Citigroup's Total Markets revenues were up 8% year over year thanks to more activity in both trading segments.
Investors hate nothing more than a business that appears to be stalling or is difficult to figure out: Whether it's revenues, or earnings, or dividends, investors gravitate to growth investments with a clear, positive revenue trend, that have the potential to deliver valuation upside down the road.
Citigroup hasn't managed to convince investors in 2014 with respect to its revenue growth prospects as top-line challenges continued to persist, and many investors were disappointed by Citigroup's weak performance results, at least in the first half of 2014.
Citigroup's mortgage settlement
Another theme that has affected Citigroup's stock price in 2014 was the back-and-forth negotiation with the Justice Department over substandard mortgages that were sold to investors before the financial crisis.
Mortgage securities sold to investors ultimately collapsed in value and inflicted great financial harm on Main Street, banks, pension funds, insurance companies, and other financial institutions.
Given the depth and scale of the financial crisis, it wasn't a big surprise that the Justice Department was going to seek an appropriate settlement amount from Citigroup as well as other large Wall Street banks.
JPMorgan Chase (NYSE:JPM) was made to pay $13 billion last year, and Bank of America (NYSE:BAC) just recently settled Justice Department allegations of improper mortgage practices for nearly $17 billion. Citigroup itself agreed to pay $7 billion to avoid a government lawsuit, which would have been a major public relations disaster and would have put the bank at risk of an even higher legal bill.
These big numbers surely frightened investors, as large settlements usually translate into serious blows to short-term bank profitability. In addition, multibillion-dollar settlements have the potential to delay or disrupt shareholder remuneration plans, which is something investors quickly freak out over.
Since the stock market is all about perceptions, Citigroup wasn't the only stock that had a hard time this year. JPMorgan's stock also declined 2% in 2014, while shares of Bank of America at least managed to squeeze out a 5% year-to-date gain for investors.
Citigroup has fought an uphill battle in 2014 and faced a variety of challenges that negatively affected investor sentiment. The looming settlement with the Justice Department and the appearance of a stalling business with persistent revenue challenges didn't help the bank in attracting investors, either.
This, however, might very well change in the years ahead, as Citigroup has put its mortgage troubles to rest and can now concentrate on growing its strong consumer and commercial banking business. Cyclical tailwinds from the economy could further provide room for revenue and earnings surprises in 2015.