This Bank’s Sour Q4 Just Sweetened the Stock

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Although the stock was trading at a 52-week high ahead of Citigroup’s (NYSE: C) Q4 report, Street expectations didn’t match what the valuation presumed. Aside from concerns about Citi’s recovery strategy, the bank was also installing new leadership with Michael Corbat taking over as CEO with Vikram Pandit leaving.

This means changes were coming – the extent of which were unknown. Then again, investors already knew that Citi was being outperformed by rivals JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC). Essentially, Q4 arrived as expected and the stock will be rewarded for it in the coming quarters.

Q4 Wasn’t Great, But Broadly Expected

As I’ve said previously, Street pessimism increased ahead of Citi’s report, dropping EPS estimates lower over the past 90 days from $1.04 to 96 cents. Likewise, fiscal year estimates also moved down 4% to $3.89 from $4.07. So with that in mind, only a catastrophe would have been a disappointment – the report was far from it.

Citi posted net income of $1.2 billion, or 38 cents per share on revenue of $18.7 billion. When excluding items, the bank said it earned 69 cents per share. Citigroup missed on both top and bottom lines as analysts were expecting revenue of $18.82 billion.

Granted, revenue arrived pretty light despite advancing 9%. Then again, that profits soared 25% amid such a tumultuous year was still encouraging. And this is despite several legal battles and charges, including payments of $2.32 billion related to layoffs and lawsuits.

Sector Comparison Equates to Decent Performance

Putting things in perspective, we can point to Wells Fargo’s performance, which recently beat both top and bottom line estimates. Wells’ profits totaled $5.09 billion, up from $4.11 billion year-over-year – helped by better than expected performance in mortgage-banking income and credit. Investors applauded the performance. But Citi’s profit growth of 25% actually outperformed Wells’ 24% jump in net income.

What’s more, much of Citi’s results were adversely impacted by new legal costs of $1.29 billion, which equates to 27 cents per share. And then there was the previously announced corporate restructuring charge of $1.03 billion amounting to 21 cents per share.

For that matter, these issues are not unique to Citi as Bank of America (NYSE: BAC) has been in legal battles of its own. However, BofA’s charges had a 60% impact on its earnings, resulting in only $367 million in Q4 profits. Then again, as with Citi, BofA’s issues should have surprised no one.

Not only did Bank of America reach a $10.4 billion settlement with Fannie Mae, BofA absorbed a charge of $1.1 billion, or 6 cents per share, as part of the independent foreclosure review acceleration agreement. Citi’s portion of the foreclosure charges totaled $305 million, which pales in comparison to what BofA had to pay.

Regardless, Bank of America still managed to beat EPS estimates by 1 penny. The only true outperformer within the sector was JPMorgan, which posted a 53% increase in Q4 profits, helped by strong mortgage banking and higher lending. Analysts were expecting earnings to arrive at $1.20 per share on revenue of $24.46 billion. JPMorgan posted net income of $5.7 billion or $1.39 per share.

Although Citi’s Q4 performance does not match up well with JPMorgan’s, relative to expectations it was pretty good. Plus, considering the adverse impact of the legal charges and foreclosure settlements, Citi actually outperformed both Bank of America and Wells Fargo. For the performance, CEO Michael Corbat said, “Our bottom line earnings reflect an environment that remains challenging with businesses working through issues like spread compression and regulatory changes as well as the costs of putting legacy issues behind us.”

Corbat’s comment addresses the investment approach with Citigroup. By stating “putting legacy issues behind us,” management is saying it knows where it is. To the extent that it can remove these uncertainties, Citi will eventually become a worthwhile stock to hold.

This quarter was about putting everything on the table. While it serves to lower expectations, they are nonetheless becoming more realistic, which is a good thing for the stock. Going forward, Citi will be placed in a position to exceed its numbers. Meanwhile, the economy is improving and the bank will adjust to new regulations.

Bottom Line

Despite better than expected performances from Wells Fargo and JPMorgan, I issued caution ahead of Citi’s report and suggested that investors should curb their enthusiasm. Seeing as the stock dropped 5% on the announcement, it was the right play. However, with lowered expectations and fewer uncertainties, a different angle has now unfolded.

The banking giant has a clear plan to turn things around – remarkably, much quicker than analysts might expect. Even better, risks are being lowered. The stock is attractive relative to its books value and if Citi can continue to grow profits in the mid-20% range, the stock should eclipse $50 by the second half of the year. 

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc., Bank of America, JPMorgan Chase & Co., and Wells Fargo. 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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