Citigroup: Not A Convincing Buy Right Now – Citigroup Inc. (NYSE:C)

Citigroup, Inc. (NYSE:C) reported mixed results on Monday. The Wall Street bank managed to beat on earnings but missed revenue expectations. Even though Citigroup’s shares are still priced at a discount to accounting book value, growing downside risks and the Fed’s scaled back interest path are weighing on the investment thesis. Citigroup is buying back a ton of shares, but that may not be enough to entice investors to buy.

Citigroup – First Quarter Overview

Citigroup has had a moderately decent first quarter.

In the first quarter of 2019, Citigroup’s revenues decreased two percent to $18.58 billion compared to the first quarter of 2018 when the bank pulled in $18.87 billion. The reported revenue figure slightly missed consensus revenue expectations of $18.63 billion. Citigroup’s earnings, however, were not that bad: Q1-2019 earnings were reported at $4.71 billion, up 2 percent compared to the year-ago period. On a per-share basis, Citigroup raked in $1.87/share in profits, marking an eleven percent year-over-year increase. The analyst consensus estimate was for earnings per share of $1.80.

Source: Citigroup Investor Presentation

Citigroup’s consumer business remains in good shape. The bank’s largest business enjoyed 4 percent year-over-year revenue growth to $8.45 billion in the last quarter and benefited from an operating margin improvement. Total division earnings jumped 14 percent year over year to $1.44 billion.

Citigroup: Not A Convincing Buy Right Now - Citigroup Inc. (NYSE:C)Source: Citigroup

Citigroup runs a tight ship and has focused relentlessly on bringing down its costs. Measured by its efficiency ratio, Citigroup has had some success doing so: The efficiency ratio, which measures expenses as a percentage of revenue, has continuously declined in 2017/8 and fell to a new low of 57.2 percent in the first quarter of 2019.

Citigroup: Not A Convincing Buy Right Now - Citigroup Inc. (NYSE:C)

Source: Citigroup

Net Interest Income Growth

Citigroup’s net interest income has continually increased throughout 2018 as the Fed raised short-term interest rates: In an environment of rising rates, banks can charge more money for loans which has a positive earnings impact.

Citigroup’s net interest income has risen from $10.9 billion in Q1-2018 to $11.8 billion in Q1-2019, reflecting an increase of 7.9 percent. That said, though, the Fed has muted its interest rate outlook in March due growing downside risks and slowing economic growth.

Citigroup: Not A Convincing Buy Right Now - Citigroup Inc. (NYSE:C)Source: Citigroup

Q1-2019 Capital Returns

Citigroup returned billions of dollars in capital to shareholders in Q1-2019. In the first quarter of 2019, Citigroup bought back 66 million shares and returned a total of $5.1 billion to investors throughout buybacks and dividends.

Book Value Growth

Citigroup’s tangible book value keeps growing. Citigroup reported a first quarter 2019 tangible book value of $65.55/share, which reflected 9.0 percent growth since the fourth quarter of 2017.Citigroup: Not A Convincing Buy Right Now - Citigroup Inc. (NYSE:C)Source: Achilles Research

Valuation

Citigroup’s shares are still priced at a discount to accounting book value and are the cheapest in the sector. Here’s how Citigroup’s P/B-ratio compares against the price-to-book-value-multiples of Bank of America (BAC) and Wells Fargo (WFC).

ChartData by YCharts

Risk Factors

Investors in Citigroup face two major risk factors:

1. A U.S. recession would likely negatively affect the bank’s ability to grow its deposit and loan base. Citigroup would also most certainly see an increase in loan defaults and charge-offs;

2. The Fed’s scaled back interest rate path limits Citigroup’s net interest income growth.

Your Takeaway

With the Fed muting its economic (and interest rate) growth outlook for the remainder of 2019, Citigroup will have a harder time going forward to produce net interest income growth. Downside risks could grow even further in 2019 if a U.S.-China trade deal doesn’t materialize and corporate earnings growth slows throughout the year. Though shares are still priced at a discount to accounting book value, the overall value proposition is not that convincing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.