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Dear Investors, 

Dear Investors,

Welcome to the eighth edition of our recently launched  TipRanks Smart Value Newsletter!

In each Newsletter, we aim to highlight an undervalued stock poised for long-term gains. Each week, our analysts will identify an overlooked opportunity – a company with strong fundamentals and a resilient business model, whose stock is trading below its intrinsic value.

▣ Note to Investors: As we enter uncharted territory with the onset of a global tariff war, we are now at an unstable partial truce. Markets are experiencing a notable surge in volatility. This environment has reduced visibility into earnings and valuations to nearly zero, leaving analysts at a loss on how to factor near-total uncertainty into their outlooks. However, markets will rally again sooner or later—as they always do. Given this backdrop, we choose to look past near-term unknowns and focus instead on strong fundamentals and sound business models, recommending quality stocks when their prices reach attractive levels relative to their industries and historical trends.

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This Week’s Top Value Pick: Citigroup (C)

Citigroup (C) is a is a leading global financial services company, providing banking, investment, and wealth management solutions to individuals, corporations, and institutions. Its operations span consumer banking, corporate and investment banking, and global markets, with a strong presence in North America, Asia, and Latin America. Citigroup is one of the largest banks in the U.S., renowned for its extensive international network and expertise in capital markets and transaction services.

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Historic Evolution

Citigroup traces its origins to the City Bank of New York founded in 1812. By the late 19th century, it expanded internationally, establishing a presence in London and Asia, laying the groundwork for global operations. In 1918, it became the first U.S. bank to reach $1 billion in assets, driven by commercial banking and trade financing.

The 1998 merger with Travelers Group, valued at $70 billion, formed Citigroup, creating a financial powerhouse integrating banking, insurance, and investment services. This transformative deal expanded Citigroup’s global footprint and diversified revenue streams, positioning it as a leader in consumer and corporate banking. Strategic acquisitions, such as Banamex in 2001, strengthened its Latin American presence, targeted investments in digital banking and wealth management supported growth, particularly in Asia. In the 2000s, Citigroup capitalized on global capital markets, driving earnings through investment banking and trading. Despite challenges during the 2008 financial crisis, requiring government support, Citigroup restructured by divesting non-core assets and focusing on core banking and wealth management.

Today, with a market capitalization of approximately $128 billion and annual revenues (TTM) of nearly $72 billion, Citigroup stands as a top-tier global bank, ranked #68 on the Fortune Global 500, driven by disciplined capital allocation and diversified earnings growth.

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Strategic Reshaping

Citigroup has shaped its global presence through strategic mergers and acquisitions in the 21^st century. In the early 2000s, the company aggressively expanded its consumer and international banking footprint. The 2000 acquisition of Associates First Capital added 15 million U.S. lending customers and boosted fee income. Between 2001 and 2005, Citi expanded in Latin America with the acquisition of Banamex and tripled its New York retail presence through the acquisition of the European American Bank.

The 2008 financial crisis, which necessitated a $45 billion bailout from the U.S. government, shifted Citigroup’s strategy. Facing losses from mortgage-backed securities, Citi merged its Smith Barney brokerage with Morgan Stanley in 2009, retaining a 49% stake, which it fully divested by 2013 to strengthen its capital position.

Following this financial crisis, Citicorp (core banking) and Citi Holdings (non-core assets), focused on divestitures to streamline operations. Since 2015, the company has focused on smaller deals and fintech partnerships to enhance digital platforms like CitiDirect, moving away from large-scale acquisitions.

In September 2023, Citigroup announced a major restructuring to accelerate its strategic transformation. Key changes included eliminating management layers and consolidating international leadership and creating a new Client organization. Leaders of the five core businesses now report directly to the CEO, streamlining decision-making and accountability. The plan also targets approximately 20,000 job cuts over several years to simplify operations, enhance client service, and support strategic execution.

As a part of this restructuring, Citi continued its divestitures, exiting the consumer banking business in Korea and Poland, winding down operations in Russia, and exiting 14 markets in total. In December 2024, it completed the separation of its institutional and consumer businesses in Mexico, a key step toward the planned IPO of its Banamex Consumer unit expected later this year or early next.

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Structural Transformation

Citigroup operates a diversified financial services model through five core segments: Services, Markets, Banking, Wealth, and U.S. Personal Banking (USPB). Services include Treasury and Trade Solutions (TTS) and Securities Services. The Markets segment generates trading revenue from fixed income, currencies, and equities. Banking covers investment banking and corporate lending, while Wealth focuses on individual and high-net-worth clients. USPB provides retail banking, credit cards, mortgages, and wealth advisory, earning revenue through net interest margins, card fees, and asset management.

As of 2024, Citigroup maintains operational presence in nearly 95 countries, serving over 120 million clients, and managing $2.4 trillion in assets.

Citi’s outlook for sustained earnings and free cash flow growth is supported by streamlined operations and a focus on high-return businesses. The bank is exiting consumer banking in 14 markets and pursuing aggressive cost reduction efforts. Investments in digital platforms like CitiDirect and AI-driven transaction services are enhancing client engagement and operational efficiency. Recent initiatives include launching “Agent Assist,” a generative AI tool for USPB customer service, and retiring legacy applications to modernize infrastructure. Citi has also partnered with Palantir to strengthen its Wealth segment by improving client onboarding, account management, and real-time data insights.

Additionally, Citi’s commercial banking division is expanding rapidly by supporting cross-border clients, particularly born-digital firms in markets like India, Australia, and Japan, leveraging its global TTS and banking capabilities.

Citi anticipates a volatile macroeconomic environment marked by tariff risks, regulatory changes, and geopolitical uncertainty. Corporate and consumer clients are exhibiting caution through inventory stockpiling and delayed capital expenditures. However, Citi expects to benefit from facilitating shifting trade flows and offering comprehensive risk management solutions in this environment.

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Restructuring Gains

Over the past three years, Citigroup’s revenues and EPS have declined at a CAGR of 0.4% and 9.4%, respectively, impacted by market fluctuations, rising operating expenses, organizational restructuring, and broader macroeconomic conditions.

However, Citi demonstrated strong performance in Q1 2025, reporting revenues of $21.6 billion (up 3% YoY) and EPS of $1.96 (up 24% YoY), both exceeding estimates. The bank’s Return on Tangible Common Equity (RoTCE)¹ rose 150 basis points year-over-year to 9.1%, reflecting improved operational efficiency. Growth was driven by its five core businesses – Services, Markets, Banking, Wealth, and U.S. Personal Banking, with Wealth and Markets delivering standout revenue growth of 24% and 12%, year-over-year, respectively.

Citi’s cost of credit rose 15% YoY to $2.7 billion in Q1, driven by higher net credit losses in cards and increased loss allowances. Management expects card net charge-off rates to peak in the first half of 2025, reflecting consumer stress from inflation, elevated interest rates, and the fading impact of pandemic-era stimulus, before moderating in the second half.

Citi’s credit management remains conservative, backed by $23 billion USD in reserves and an 8.2% card reserve ratio. The bank’s efficiency ratio improved significantly, declining by ~490 basis points YoY to 62%, reflecting stronger cost control relative to revenue.

Looking ahead, Citi projects FY25 revenues of $83.6 billion at the midpoint, with Net Interest Income (NII) ex-Markets growing 2%-3% and expenses coming in slightly below $53.4 billion.

Strategically, Citi is targeting a RoTCE of 10%–11% for FY26, supported by revenue growth, risk-weighted asset (RWA) optimization, and a reduction in deferred tax assets (DTA). By shedding higher-risk assets, improving risk models, and streamlining its asset mix, Citi aims to lower capital requirements and enhance capital efficiency. Reducing DTAs—assets arising from timing differences between tax and accounting rules—will shrink the tangible common equity base, further boosting RoTCE and improving earnings quality.

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1 – Return on Tangible Common Equity (RoTCE) measures how efficiently a bank uses its tangible common equity, excluding intangibles and preferred equity, to generate net income. It’s calculated as net income divided by average tangible common equity.

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Value Gap

Citigroup has maintained a stable quarterly dividend, underscoring its strong financial position and commitment to shareholder returns. Over the years, the company has consistently raised its dividend, except between 2020 and 2023, when U.S. regulators, including the Federal Reserve, restricted payouts to preserve capital during the pandemic.

Currently, Citi offers an annualized dividend of $2.24 per share, yielding 3.24%, double the financial sector average of 1.5%. Analysts project a 6.4% dividend increase for the current fiscal year, supported by a manageable payout ratio of 36.4% and a positive outlook. However, management has not outlined a formal dividend growth target, focusing instead on operational efficiency and regulatory compliance.

In addition to dividends, Citigroup actively returns capital through share buybacks. In January 2025, its board authorized a $20 billion multi-year repurchase program, equivalent to roughly 16% of its market capitalization. In the first quarter, Citi returned $2.8 billion through dividends and buybacks, exceeding earlier guidance. Future repurchases will be evaluated quarterly, reflecting regulatory capital uncertainties.

Citigroup’s strong balance sheet underpins its capital return strategy. Total assets rose 9% sequentially to $2.6 trillion, driven by seasonal Markets² trading activity and cash buildup. Liquidity coverage ratio (LCR)³ stands at 117%, backed by $960 billion USD in liquidity resources. Its CET1⁴ ratio of 13.4%—approximately 130 basis points above regulatory minimums—supports continued shareholder distributions, with a target of 13.1% for FY25, pending updates to the Stress Capital Buffer.

The Federal Reserve’s proposed changes to stress testing, including averaging results over two years and extending capital plan deadlines to January after the banks receive the stress test results, aim to enhance transparency and stability for banks like Citi.

Citi’s share price has increased by about 10% over the past year amid improved financials post-restructuring. It is currently trading at a P/E ratio of 10.5x, a ~4% discount to the financial sector average, and at just 0.66x the price-to- book value, almost 44% below the sector average.

Wall Street analysts remain bullish, citing Citi’s strong Q1 results, cost discipline, and undervaluation, with some projecting up to 61% upside potential, supported by a tangible book value of $91.52 per share, an increase of 6% year-over-year, making it an attractive option for income and capital appreciation. Furthermore, discounted cash flow models suggest Citi is undervalued by nearly 57%.

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2 – Seasonal Markets trading assets are Citigroup’s trading-related assets that fluctuate throughout the year, driven by predictable changes in market activity, such as at the start of the year, quarter-ends, or major financial events.

3 – LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover 30 days of cash outflows during financial stress.

4 – CET1 Capital ratio measures a bank’s solvency and resilience by comparing high-quality capital to its risk exposure.

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Investing Takeaway

Citigroup presents a compelling value proposition, offering an attractive dividend yield and substantial upside potential. Trading significantly below the sector average, Citigroup’s stock is notably undervalued, with analysts projecting up to 61% upside. The bank’s solid balance sheet, reinforced by robust liquidity and a strong CET1 ratio, supports its capital return strategy. Additionally, Citi’s focus on digital banking, cost reduction, and operational efficiency positions it well for sustained earnings growth. In a volatile macroeconomic environment, Citigroup is emerging as a “port in the storm,” offering both income stability through dividends and meaningful potential for capital appreciation.

• Category: Smart Value