Investing in bank shares has not been popular in the past decade. And the logic behind investor indifference was logical. After the 2008 financial crisis, banks remained under strict regulatory control, forcing them to shift their focus mainly to determining their balance sheets and avoiding risky lending practices. As a result, the broad benchmark to represent bank shares over the past decade underperformed the 8%.
The stream of bad news from the banking sector also did not end even after the apocalyptic events of 2008, caused by greed and poor credit decisions by lenders. From the disclosure of fraud with Wells Fargo (NYSE 🙂 accounts, which has revealed the existence of millions of fake accounts, to the role of Goldman Sachs (NYSE 🙂 in a recent Malay corruption scandal, there is a constant stream of negative news about this has been a sector that has kept cautious investors on the sidelines.
But that sour mood about bank shares does not mean that investors must paint all names with the same brush. Shares of some of the largest donors have become attractive after years of restructuring efforts, within a more robust regulatory environment. In this space we especially love Citigroup (NYSE :).
Sustainable cost-saving improvement of Citi Outlook
If you want to visit this sector again, we think that Citigroup is currently one of the best banking stocks. We derive our optimism from the ongoing cost-saving measures taken by the lender over the past decade and the rebalancing of its portfolio. These efforts are beginning to bear fruit and the bank sees improvements in both revenue and profit, helped by the strong US economy, low unemployment and robust consumer spending.
After a sharp correction in the last quarter of 2018, Citigroup shares are back in play, with an increase of 24% this year, about double the gains of the KBW Bank index which rose 13% in this period . The stock rose by 3.4% on Monday and hardly changed yesterday when it closed at $ 64.42.
With this improved macro background, the success of CEO Michael Corbat in sustainably lowering costs over the past decade has played a major role in improving lender health. These efforts are reflected in the lender's rapidly improving efficiency ratio or costs as a percentage of revenue. This yardstick has come to less than 60% in the last four years, making Citi the only major bank capable of maintaining such a winning streak.
The lower this ratio, the better the financial health of the lender, because it shows how much money a bank has left to lose loans, pay dividends and buy back shares.
Citigroup & # 39; s last quarter showed that the bank is in a good position to adjust quickly if market conditions deteriorate. In the fourth quarter, when trading volumes fell sharply, management quickly cut spending, led by a sharp reduction in compensation. The bank payment was 14% lower than in the third quarter. Thanks to this flexibility, the bank was able to beat its earnings expectations in the quarter despite a sharp fall of 21% in fixed-income trading.
Another incentive to own Citigroup shares is that the lender has made returning capital a top priority, a practice that was discontinued after the 2008 financial crisis. The quarterly dividend payments have been growing rapidly since 2016. They rose more than 40% in 2018, bringing the quarterly dividend to the current $ 0.45 per share with an annual dividend yield of 2.9%.
Bottom Line
In the short term, the economic headwind that is gaining momentum around the world can discourage investors from taking risks at banks whose growth is closely linked to the general health of the economy. But for long-term investors, Citigroup's stock is a good choice, given the profit momentum, the growing dividends and the improvement in balance sheet quality.
