Citigroup Is Poised to Benefit From an Improved Economic Landscape

Citigroup will likely report solid fourth quarter results on the back of a more favorable macroeconomic environment. Considering low valuations, this may be a good time to bet on the bank ahead of earnings.
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Fourth quarter earnings season is about to kick off, and banks will be the first companies to provide an update on their most recent performance. On Jan. 14, Citigroup  (C) - Get Report will share its financial results against analyst expectations of $17.95 billion in revenues, representing nearly 5% growth year-over-year, and $1.86 in earnings per share.

Finally, A More Favorable Environment

Judging by Citigroup's stock price increase of more than 50% in 2019, one might reasonably assume that last year was a walk in the park for the New York City-based bank. Instead, the past twelve months have been quite eventful and adrenaline-filled for financial services providers in general.

The first quarter of 2019 marked a recovery from the effects of another U.S. government shutdown and the bear market of the previous period. But soon enough, trade war escalation and uncertainty regarding monetary policy took hold, leading to doubts over the strength of the global economy, deterioration in business sentiment and the first yield curve inversion in a decade. Citigroup and its peers suffered as a result, primarily on the institutional side of the business (i.e. underwriting, advisory and trading).

Now, for the first time in several months, the macroeconomic landscape is looking much more stable and less menacing. Short-term interest rates have dropped under the oversight of the Federal Reserve, while the U.S. and China began to draft a solution to the trade impasse. Consumer activity seems to be as strong as it has been in the past few years, as employment metrics and wage growth remain solid.

Given the current scenario, Citigroup is likely to post fourth quarter results that will please investors. Consumer banking, a segment that represents nearly half of the company's total revenues, will likely be the shining star once again. Loan balances across the industry have been rising uninterruptedly since 2013, and net interest margin should be a bit less under pressure this time due to the recent steepening of the yield curve.

A bit harder to project are the results of the bank's institutional clients division. Last quarter, Citigroup's executive team anticipated that banking and market revenues in the fourth quarter would "reflect the overall environment". The remarks failed to instill much confidence in the company's competitive advantage over better-performing peers like JPMorgan  (JPM) - Get Report.

Once again, tight overhead cost management will probably be a very important factor in producing bottom-line growth. On this front, Citigroup's managers have proven competent over the past several quarters, having driven efficiency ratio down to less than 57% last quarter from nearly 60% three years ago.

Lifted By the Rising Tide

I expect Citigroup to have a satisfactory fourth quarter earnings day, primarily due to an improved macroeconomic landscape "lifting all boats" in the financial services sector. As a result, the stock will likely continue to enjoy market support in the foreseeable future.

To be sure, I maintain JPMorgan as my top pick in the banking space, given the solidity of the balance sheet and the company's track record of consistently delivering high returns on equity, even during periods of economic uncertainty. But because Citigroup trades at a current-year P/E of 9.5 times, by far the lowest multiple within the Big 4 peer group, the risk-reward dynamic may very well favor an investment in Citigroup shares at this moment.