Citigroup (NYSE: C): Assessing the Turnaround Potential

Citigroup’s recent surge in stock price to nearly $60 at the start of 2024 has surprised many, considering the bank’s prolonged struggle to execute successful turnaround plans. While the stock remains undervalued, trading below tangible book value (TBV), investors are cautious due to the company’s history of failed restructuring efforts. Here’s a detailed analysis of Citigroup’s current situation and the potential for a successful turnaround:

Improving Efficiency:

Citigroup aims to enhance its operational efficiency by reducing costs while investing in technology. The company plans to slash expenses by at least $2.0 billion in 2024, with a long-term goal of lowering operating expenses to $51.0 billion from $54.3 billion in the previous year. Additionally, Citigroup targets revenue growth of approximately 4% annually, providing leverage for the business. However, the efficiency ratio target for 2024 remains relatively high at 67%, highlighting the need for significant improvement compared to peers like JPMorgan Chase, which operates at a mid-50% efficiency ratio.

Market Skepticism:

Despite Citigroup’s restructuring efforts, the market remains skeptical, given the company’s history of unsuccessful turnaround attempts. Analysts and investors question the feasibility of the current plan, citing past disappointments. Citigroup’s stock trades at a significant discount compared to its peers in the banking sector, with a price-to-tangible book value (P/TBV) ratio of only 0.64x. While analysts forecast a boost in profitability, with a consensus estimate for 2025 EPS reaching $7.11, the stock trades at a low multiple of just 8x these earnings estimates.

Upside Potential:

Analysts acknowledge the profit potential of Citigroup if the restructuring plan succeeds, with some raising their price targets on the stock. However, these targets remain below the TBV, indicating lingering doubts about the company’s ability to deliver substantial returns. Citigroup’s CET1 ratio stands at a robust 13.3%, providing flexibility for shareholder returns through dividends and stock buybacks. The potential impact of Basel III rules could further enhance the bank’s capital position, potentially leading to aggressive share repurchases.

Investment Outlook:

Despite the challenges and skepticism, Citigroup presents an opportunity for investors due to its significant discount to TBV and potential for a successful turnaround. With an earnings power of $10 per share, the stock could reach $100 with a modest P/E multiple. Furthermore, Citigroup’s recent efforts to boost TBV and return capital to shareholders demonstrate its commitment to creating value. Investors should monitor the progress of the restructuring plan closely and consider holding the stock for its long-term growth potential.

Conclusion:

In conclusion, Citigroup’s journey towards a successful turnaround remains uncertain, given its history of failed restructuring attempts. However, the stock’s undervaluation and potential for improved efficiency present an attractive opportunity for investors willing to take on some risk. With a clear roadmap for cost reduction and revenue growth, Citigroup has the potential to unlock significant value and deliver substantial returns to shareholders in the long run. Investors should approach Citigroup with caution but consider holding the stock for its upside potential and value proposition in the banking sector.