2013 Outlook for Citigroup
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Citigroup (NYSE: C), well known for its extensive global footprint, is expected to outperform in the year 2013. Much of this anticipated outperformance is associated with the growth in emerging markets, which Credit Suisse expects to accelerate during 2013 and 2014. Therefore, in the long term I am bullish on Citigroup. The bank is scheduled to disclose its fourth quarter performance on the Jan. 17.
The Bank’s Global Presence
Citigroup’s domestic operations contributed 44% to earnings, while the rest came from its international operations. Operations in Asia alone contributed 22% to the bottom line. This reflects the bank’s exposure to international markets, in particular the emerging markets. In addition, the emerging market presence is diverse by product, business line and country.
The bank underperformed during the first half of the prior year, as the stock price appreciated just over 4% during that time. Much of the underperformance was blamed on the slowing growth in emerging markets. This slow growth in the emerging markets is expected to reverse, leading Citigroup to grow faster than most of its peers in the US banking industry. Credit Suisse’s Global Economics Research team expects a 5.2% growth rate in 2013 and 5.6% 2014 in emerging markets where Citigroup has a presence. This is compared to 4.7% growth in these regions in 2012.
The Euro Zone is expected to show a modest recovery as the fiscal drag lessens and financial conditions loosen. Within the emerging markets, China, India and Brazil are expected to show stronger growth. The bank derived around 44% of revenues from these regions during 2011.
Several of the bank’s repositioning actions across its business segments have reduced overall expenses. The bank further plans to eliminate 11,000 positions, benefiting 2014 bottom line by approximately 3%. Most of the positions (around 55%) are expected to be eliminated from the non-client facing Operations and Technology limiting the negative impact to the top line. The company is expected to achieve $900 million cost savings during the year 2013. Within the consumer banking segment, Citigroup is anticipated to scale back its operations in Pakistan, Romania, Turkey and Uruguay. In conclusion, the bank will reduce or totally eliminate modest positions in countries where it is less likely to earn handsome returns.
Capital Position and Relative Valuations
Compared to most peers in the US banking industry, Citigroup appears to have adequate capital. Citigroup's tier 1 common capital ratio under Basel III was 8.6% at the end of the most recent quarter. This is marginally above the regulatory requirement of 8.5%. At the end of the third quarter of 2012, Citigroup reported that it was able to improve its tier 1 capital ratio of 13.9% by 40 basis points during the past nine months. The tier 1 common capital ratio improved 100 basis points to 12.7% over the same time period. Compared to this, the tier 1 capital ratio for Bank of America (NYSE: BAC) was 11.5% at the end of the third quarter of the current year. The tier 1 capital ratio for Wells Fargo (NYSE: WFC) was 13.64%.
Citigroup trades at attractive valuations compared to most of its peers in the US money center banking industry. Citigroup is trading at a 19% discount to its tangible book value, compared to 17% discount for Bank of America. Wells Fargo trades at a70% premium to its third quarter tangible book value.
Continued growth in the emerging markets will provide an opportunity for additional growth at attractive returns for Citigroup. Additionally, the bank’s repositioning strategy will provide support to the stock price in 2013. Therefore, I recommend investors buy Citigroup.
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