Citigroup and JPMorgan: reviews

Citigroup and JPMorgan: reviews

Citigroup is a bank holding company that provides financial services to private consumers, corporations and has governments in North America, Asia, Europe, the Middle East, and Africa.

In 2020, this bank ran into several problems. First, loan officers mistakenly sent $900 million to Revlon creditors, which showed a lack of modernization. The regulator later imposed a $400 million fine on Citigroup, requiring it to correct deficiencies in its internal controls, compliance, and risk management systems. The bank’s position was also undermined by the fact that CEO Michael Corbat retired earlier than expected.

The bank started 2021 with hope. Jane Fraser took over as CEO and decided to update the bank’s strategy. She decided to give up 13 franchises that she felt were dragging the bank down. Jane Fraser has also decided to concentrate on those franchises that are already generating good profits, focusing on capital management, especially in the company’s international sector. Jane Frazier’s recovery plans have encouraged investors, which has seen Citigroup securities rise.

However, the growth did not last long, and in the second half of the year, they began to lose value again. The reason for the decline was the financial report, which showed that the bank’s expenses increased while the market conditions became tougher. The bank had to sell its consumer banking division in Australia, and there was a pre-tax loss of $68 million in Q3 2021.

The bank then announced that it would close its consumer division in Korea. Such a decision could result in another $1.5 billion fine. The reports from Citigroup CFO Mark Mason were another disappointment for investors. He said the bank would temporarily suspend share repurchases because of a new regulator rule that addressed risk management in the derivatives market.

Three short-term drivers

Should we take the bank seriously after this news? We think Citigroup can still be given one more chance. Below we will voice a few catalysts that could make a difference for the company.

First, we should wait for the report for the 4th quarter of 2021. It will not only summarize the results of 2021, but it may announce projections for the new fiscal year. It may also mention plans for further bank transformation and share buyback.

Secondly, the markets are waiting for Investor Day, which takes place on March 2, where the bank’s management will announce its plans in detail. Investors on this day will learn management’s vision for future metamorphosis, get real financial goals to track, such as how expenses will grow and how much return on equity the bank can claim in the future.

Third, we need to watch for further sales of the issuer’s franchises, which will result in a $4.3 billion capital release. If they are more successful than sales in Australia and North Korea, the bank’s market position could improve.

Citigroup and JPMorgan: reviews

Other growth drivers

If we talk about general reasons to buy the company’s shares, one of the most important is the low value of this paper. The largest bank, which has more than 4% of the deposit market share in the U.S., trades at about $63 per share and has a tangible book value (TBV) of about 80%. According to experts, the book value will exceed 80 in the 4th quarter of 2021, but even with this growth, the value of the paper will be at an acceptable level and much lower than that of competitors. For example, Wells Fargo Bank has a TBV of 140%.

Citigroup’s dividend yield currently exceeds 3%, which is a very decent figure overall, higher than any of the other three U.S. megabanks. It is a good passive income that can be accumulated while waiting for all the transformations to be completed. While Citigroup is likely to buy back shares more often than raise dividends by trading at such a low level, dividends could rise in the future.

The second half of December 2021 saw another wave of growth in the company’s stock. After leaving the area of $46, this paper grew to the level of $54.40. The next target of the buyers is near $56.50, and further, the movement will take place in the direction of $60.

News from the U.S. regulator regarding the reduction of the bailout program and the beginning of monetary policy tightening sent JPMorgan Chase stock down. Is it worth adding this stock to your investment portfolio?

JPMorgan Chase is the largest U.S. bank with more than $3 trillion in assets. By comparison, the second-largest bank in the U.S. is Bank of America, but it is second to JPMorgan Chase, with $2.4 trillion in assets.

JPMorgan Chase is the world’s largest bank not only in terms of capital but also in its size. The issuer has about 4,900 branches, which operate on all continents. The bank offers almost every possible financial service, including consumer and commercial banking, mortgage lending, credit cards, asset management, and investment banking.

Of its advantages, we note the high diversification of business, which helps it not only successfully stand up to competitors, but also the crises of the world level. For example, in 2020, amid the economic crisis caused by the coronavirus, most U.S. banks performed poorly, while JPMorgan Chase’s financial performance showed revenue growth and ROE of 12%, close to pre-pandemic levels.

The company also stands out for the high digitalization of its business. Four years ago, the bank announced the launch of a new strategy that aims to create a digital environment that is convenient for customers and the bank, and the issuer has made significant progress in implementing this program in recent years. Moreover, the bank pays a lot of attention to the concept of development, introducing the principles of ESG in its business processes and requiring similar actions from partners and customers.

How high inflation can hurt the bank

High inflation requires the regulator to act. The Fed plans to raise the Federal Funds rate three times in 2022, which will automatically increase interest rates for all borrowers. In general, an increase in interest rates is good for banks because it leads to higher net interest income.

But rising rates sometimes hurt banks. For example, if rates rise faster than expected, JPMorgan Chase’s net interest income can fall because of a mismatch between short-term and long-term borrowing.

Moreover, high-interest rates can cause the number of real estate loans to decrease and lead to higher financing costs.

High-interest rates could also hurt borrowers with floating-rate loans or loans where the rate will change if interest rates change. All of these potential risks could hurt JPMorgan’s earnings.

Financial indicators

At the end of the 3rd quarter, JPMorgan’s performance beat analysts’ estimates for revenue by 2% and EPS by nearly 25%. Such strong results were possible due to improved economic conditions in the U.S. and the world, which allowed the bank to release reserves accumulated amid uncertainty caused by the pandemic, as well as active mergers and acquisitions (M&A) activities.

The bank reported total net revenue of $29.6 billion in Q3, up 1% from the same quarter in 2020. Asset management fees of $5.2 billion were up 18% from 2020 and 1% from Q2 2021.

The bank collected $3.3 billion in investment banking fees, up 50% from Q3 2020. However, this figure showed a decrease of 5% compared to Q2 2021.

As a result, the issuer’s net income increased by 24% compared to the same quarter of 2020 and reached the mark of $11.7 billion.

Should you buy or sell the company’s shares?

The interest rate hike planned by the Fed in 2022 will give JPMorgan more room to raise its rates and, in turn, profits on some of its loans.

We are optimistic about JPMorgan’s prospects and expect the bank, together with the sector as a whole, to benefit from the improving economic situation in the U.S. and the world. According to the IMF, despite the difficulties associated with the new waves of coronavirus in the world, the sharp rise in energy prices, and supply chain problems, U.S. GDP in 2022 will grow by 6%. It will be facilitated by further vaccination, which will gradually return the economy to pre-pandemic levels, as well as by continued large-scale fiscal and monetary support measures in the world’s economies.

From a technical point of view, the bank’s shares are growing now. Over the last days, the paper has moved significantly northward and leveled out most of its recent losses. Despite the rise, it is still buyable, as the price has not reached its recent yearly high. From current levels, shares of JPM can be bought towards the $190 area.