Citigroup Still Has the Edge Despite a New Game

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Michael Corbat, the new CEO of financial giant Citigroup (NYSE: C) is currently doing some damage control via talks with bank regulators towards the return of shareholder capital. This bit of news on Citigroup, however, should not be seen as wholly disadvantageous. Forecasts of said stock say that it will rise by 50% in the coming twenty-four months; forecasts made by Wells Fargo resulting in Citigroup shares becoming part of its list of premium stock.

Citigroup’s Performance so Far

For the past month, the stock’s price has been on a gradual rise – with some dips along the way, of course – going from less than thirty-eight to its current rate: at $42.46 for the January 8 trading day as of closing. For that day, it lost about $0.01, or 0.02% of its value. After hours saw stock price rise to $42.60, or obtain an additional $0.14 for an increase of 0.33 percent. The steady growth of Citigroup stock may have been in no small part due to reports of more relaxed Basel III regulations. Said conditions, according to Buckingham Research, are actually good news for all major US banks, although the aforementioned bank is forecasted to make the most money from said developments.

Changing the Rules and Affecting the Banks

The enhanced leniency of the Basel Committee on Banking Supervision is a major contributor to the possibility of better revenue and stock price for many American banks. Formerly, the ratio of liquid, high-quality assets big banks are required to maintain was set over a hundred percent. The change in rules now allow a broader definition of what such an asset is, with the accompanying requirements slowing being phased in. The changes to the ratio proposed start at 60% in 2015, and will be increased by 10% per year up to 2019. JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo, and Citigroup are all expected to benefit from the change in rules, although Citigroup is said to rake in the greatest benefits that will go hand in hand with lower liquidity requirements. JP Morgan saw a profit increase of 53% in the final quarter of last year, which gave it high record earnings for 2012. On the other hand, Bank of America – due to the lasting effects of the financial crisis in 2008 – expects a drop of 87% in profits for the same period as it still struggles with legal problems.

Citigroup’s Liquidity Coverage Ratio

The way Citigroup works with its Liquidity Coverage Ratio gives the institution its edge over these similarly competitive big banks. Said bank discloses their LCR, possibly due to requirements of a 116% ratio. Since the requisite ratio will be considerably relaxed, Citigroup will experience the largest degree of fiscal relief. This, in turn, will give the institution the monetary capability to invest using strategies with bigger returns as opposed to holding for the meantime, for example. BAC, in comparison, is less likely to be able to do so and have as much maneuverability when it comes to investments, as they are less likely to meet the upcoming requirements for LCR. Another estimate by Buckingham places that about $50 billion of Citigroup’s cash is a potential result of this, with a minimal 5% return on that cash generating revenue of as much as $250 million. Yes, it’s a virtual shoo-in that Citigroup will rake in higher returns, as the extra money it has comes with proportional flexibility.

Will Citigroup Go So Well?

Although some developments within the corporation may push traders away – the firing of more than 10,000 employees and pulling out from emerging markets among them – the revenue potential of Citigroup is still there. Cost-cutting might seem like a negative indicator, but revenue streams via more diversified portfolios and improved returns from capital still merit the financial institution’s Outperform rating. 


RhodoraDagatan has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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