The Federal Reserve's stress test shows resilience, and Citigroup's stock price is expected to outperform its Wall Street peers based on its "value" attributes.

Notice that, among large banks in the United States, Citigroup (C.US) is the most undervalued based on price-to-book multiples. This lower valuation is mainly due to some structural factors that have led to its valuation being lower compared to peers over the years. As analyst Labutes IR pointed out in January 2023, the stock was undervalued at that time and was a good choice for long-term investors in terms of both earnings and value. Since then, Citigroup's stock has performed very well, significantly outperforming the overall stock market with a gain of over 82%, including dividends, compared to the S&P 500 index's gain of 55%. Despite its strong performance, Citigroup's valuation remains lower compared to its closest peers - JPMorgan Chase (JPM.US), Bank of America Corp (BAC.US), and Wells Fargo & Company (WFC.US). Its current trading price is around 0.81 times book value, while its competitors have higher multiples, as shown in the chart. This is largely due to its business structure. Compared to its peers, Citigroup has a much larger exposure in international markets, including some high-risk regions (such as Russia), and has a larger exposure to high-risk banking products like credit cards. Although the bank's strategy has been to streamline its international business and exit several underperforming markets, Citigroup's profitability remains below average, so its lower valuation compared to peers is justified. In fact, its return on equity (ROE) - a key indicator of a bank's profitability - was only 8% in the first quarter of 2025, while JPMorgan Chase achieved an ROE of 18% in the same quarter, higher than the industry average. This explains why JPMorgan Chase's valuation (currently at 2.4 times book value) is much higher than that of Citigroup and other large U.S. banks. From an earnings perspective, after experiencing a significant stock price increase over the past two and a half years, Citigroup currently offers a dividend yield of around 2.65%. This dividend yield is no longer as attractive either in absolute terms or compared to other banks, as the banking industry on average offers a dividend yield of around 3.15%. This yield is also significantly lower than the situation when Labutes last analyzed the bank, when Citigroup offered a dividend yield of over 4%. Therefore, Labutes believes that earnings are not the main factor in its current investment value, and future profit growth seems to be the main drive for potential upside. However, despite its successful restructuring efforts and the overall improvement in the banking industry's profitability in recent years, there are still some issues to be resolved. For example, despite efforts over the past three years to sell its Mexican consumer finance subsidiary (Banamex) to a competitor or eventually conduct an IPO, Citigroup has not yet successfully disposed of this business, indicating that the bank still needs further efforts to achieve its desired scale and business structure. Currently, its business is divided into five main operating segments: Banking, Markets, Wealth, U.S. Personal Banking, and Services. As shown in the chart, Citigroup's business has a diversified layout among the five operating segments, with Services and U.S. Personal Banking being the main revenue growth drivers in recent years. Due to restructuring efforts and actions taken by management to improve efficiency and reduce overall business risk, coupled with the benefits of higher interest rates since 2022, Citigroup's revenue and profitability have grown in recent years, improving its business structure compared to a few years ago. Recently, supported by relatively higher interest rates in the United States and increased activity in the capital markets in recent months, its operations have been quite positive. In fact, in the first quarter of 2025, Citigroup's revenue reached $21.6 billion, a 3% year-on-year increase. Both the U.S. Personal Banking and Wealth Management segments set revenue records, and the banking business department also performed well (with a 12% year-on-year revenue increase), with the stock business showing strong growth with a 23% revenue increase year-on-year. In terms of expenses, the bank has also performed very well, with overall expenses decreasing by 5% year-on-year to $13.4 billion in the quarter. Due to both revenue increases and expense decreases, its efficiency ratio increased by 490 basis points year-on-year in the first quarter of 2024, reaching 62%. This is in line with its medium-term target of maintaining an efficiency level between 60-63%. In terms of asset quality, Citigroup's credit costs exceeded $2.7 billion in the first quarter of 2025, a 15% year-on-year increase. This was mainly due to credit card-related losses and an increase in credit loss reserves due to macroeconomic uncertainty. This indicates that asset quality is still a weak spot in Citigroup's investment value. Its net profit for the quarter was $4.1 billion, a 21% year-on-year increase; tangible common equity return (RoTE) was 9.1%, still below its medium-term target of 11%-12%. As of the end of March, its common equity Tier 1 ratio (CET1) was 13.4%, about 130 basis points higher than regulatory requirements, with a leverage ratio of 5.8%. Considering the bank's risk profile, this seems to be an adequate level of capital, and recent stress test results from the Federal Reserve also confirmed this. Indeed, all 22 banks participating in the tests were able to maintain capital adequacy ratios above the minimum requirements under the assumed economic recession scenario, indicating that the banking system is well-positioned to withstand potential economic downturns. In a adverse scenario, total projected losses exceeded $550 billion, and banks were able to withstand these losses while maintaining capital levels, demonstrating that large U.S. banks still have sufficient capital to withstand severe negative impacts. In a severe scenario, a global economic downturn would lead to a peak unemployment rate in the United States rising by 5.9 percentage points to 10%, a 30% decrease in commercial real estate prices, and a 33% decrease in house prices. In this scenario, the overall CET1 ratio of the Bank of America Corp system is expected to decrease by an average of 1.8 percentage points, considering the strong capital position of the entire industry, this seems manageable. However, investors should note that the adverse scenario set for 2025 was less stringent than in 2024, making it easier for banks to report better metrics in this year's stress test results. Citigroup is no exception, as it also performed well in the Federal Reserve stress tests, reporting a minimum CET1 ratio of 10.4% in an adverse scenario. This is an improvement from last year's results, which predicted that Citigroup would see its minimum CET1 ratio drop to 9.7% in an adverse scenario. However, this is still a decrease of about 320 basis points from its CET1 ratio at the end of 2024, indicating that Citigroup's risk profile within the Bank of America Corp system remains higher than average. Nevertheless, its higher risk profile is already reflected in its higher capital requirements compared to its peers, and the bank seems well-positioned to address potential economic downturns, allowing it to continue its capital return strategy. In the first quarter of 2025, Citigroup returned $2.8 billion in capital to shareholders through stock buybacks and dividends. The bank is expected to update its capital return strategy based on the recent stress test results from the Federal Reserve next week. Given its strong capital position, it is expected that its capital return strategy will not change significantly, continuing to return the majority of annual earnings to shareholders in the form of dividends and stock buybacks, which is a positive factor for its future investment value. Conclusion Despite Citigroup's higher risk profile compared to other large U.S. banks, this seems to be reflected in its lower valuation and higher capital requirements. As recent Federal Reserve stress test results for 2025 show, the bank is well-prepared with sufficient capital to handle the risks it faces. Analyst Labutes believes that as the bank continues to take important steps to improve its business structure and reduce overall balance sheet risk, the valuation gap between it and its closest peers should continue to narrow, making it an interesting "value stock" choice within the Bank of America Corp system.