It seems Senator Bernie Sanders’ greatest applause line is when he rails about the big banks. Specifically, how they’ve only gotten larger and more profitable since the global financial crisis.
Well, he’s wrong on both counts.
This is especially ironic, given that big banks are struggling not only in America, but around the world. Global bank stock indices are down 15% so far in 2016, and the prospects going forward aren’t bright either.
There are many reasons for this poor performance – higher capital requirements, low interest rates, more regulatory burdens, a weak global economy, volatile trading markets, as well as the need to set aside reserves for oil and gas credit issues.
Anemic trade worldwide illustrates the global economy’s struggles as it wrestles with a blend of high debt and low growth – not exactly the best environment for banking.
Growth in trade is projected to be below 3% for the fifth consecutive year – a first since the 1980s, according to the World Trade Organization. And in 2015, the value of goods traded across borders dropped almost 14%.
This is why the six largest U.S. banks’ combined $97 billion in revenue was down about $10 billion from a year earlier. It was the weakest quarterly revenue shortfall since late 2014.
Even blue-chip banking kingpin Goldman Sachs (GS) seems to be fighting an uphill battle for revenue and profits.
Goldman’s first-quarter revenue fell to $6.3 billion from $10.6 billion a year ago. Management responded to its worst first quarter in 12 years by announcing cuts to expenses and employee counts.
So, let’s look at the charge that big banks are getting bigger and therefore more vulnerable by looking at Citigroup Inc. (C).
Citigroup: Cheap, Out of Favor and in an Uptrend
My relationship with Citigroup goes back a long way. When I was finishing graduate school, the big banks were attractive places to get your first job because of their prestige and great training programs.
Citigroup (then called Citibank) was considered the big prize because of its global reach, and its reputation for having the most aggressive bankers with commensurate higher bonuses.
But I killed my chances of working there when one interviewer asked me what I thought banking was, and I quickly responded with “banks move money and make money.”
Since the global financial crisis seven years ago, Citigroup has sold more than 60 businesses, shedding retail bank branches from Miami to Pakistan.
In all, the bank’s assets have been cut back by $700 billion – an amount roughly equivalent to Switzerland’s gross domestic product (GDP). And since 2012, the company’s work force has been slashed by 40,000 jobs.
But although Citigroup is smaller than it used to be – with revenue and assets down year over year – it still posted net income of more than $17 billion, the most since 2006.
The value of Citi’s international network alone with 4,400 branches in 36 countries seems quite high to me. Revenue and profits are growing in Latin America and Asia. Above all, Citigroup continues to cut expenses – interest revenue now represents a healthy 64% of the bank’s overall revenue.
For me the decisive factor here is value, with Citigroup trading at a hefty 29% discount to tangible break up (book) value.
Although Citigroup stock is down 12% over the last year and down 8.5% so far in 2016, its shares have rebounded 12.9% in the last month.
This is what I like, a cheap stock with improving fundamentals in an uptrend.
So, although big banks are in a tough environment, Citigroup is a great stock to tuck into your global portfolio.