Citigroup (C -0.49%) Chief Executive Officer Jane Fraser has been making moves to turn the sprawling bank into a leaner, more profitable business. The bank has made several moves in recent years to realign its business and restructure its management team, and investors have taken notice. Analysts at Wells Fargo believe Citigroup's stock could double during the next three years due to these strategic moves.
Citigroup trades at a steep discount and touts a dividend yield of almost 4%, making it appealing to value and dividend investors. Here's what would need to happen for the stock to double from here and whether the bank is a good buy for investors today.
Citigroup's widespread business weighed on its performance
Citigroup is a huge bank with a global reach, with consumer banking businesses around the world, at one time including in Australia, India, Vietnam, and the Philippines. While it had a broad reach, the bank spread itself thin, making it hard to analyze and manage risks, and it has underperformed relative to its banking peers as a result.
One key measure in which we can see this underperformance is its return on equity (ROE). ROE is a standard profitability measure that shows a bank's profit as a percentage of shareholders' equity. Citi's ROE over the past decade is 6.99%, well below its banking peers Bank of America (8.79%), Wells Fargo (11.33%), and JPMorgan Chase (13.23%).
C Return on Equity data by YCharts.
On top of that, Citigroup got hit with a $400 million fine in 2020 due to "several long-standing deficiencies," including internal controls, risk management, and data governance.
Citigroup looks to right the ship under CEO Fraser
In 2021, Fraser took over Citigroup's CEO role, replacing longtime chief Michael Corbat. Fraser has been with the bank since 2004 in various roles across its investment and global banking, mortgage, and consumer and commercial banking divisions.
Fraser laid out her plans early on: to eliminate less profitable operations and concentrate on those that will boost its efficiency and profitability. First, the bank would eliminate costly businesses and improve its expense and capital structures. When Fraser took over, she announced Citigroup would sell or wind down 13 global consumer franchises -- including its highly profitable business in Mexico.
The bank has made other moves to slim down, consolidate operations, and streamline. Last November, it announced it would eliminate 300 senior management roles. According to a Bloomberg report, this is about 10% of Citigroup's workers two levels below Fraser's executive management team.
Citigroup could reach $100 in the next three years, according to one analyst
Citigroup's restructuring has analysts, like Mike Mayo and his team at Wells Fargo, optimistic about the bank's future. In a note to investors, the bank raised its one-year price target for the bank to $70 per share and its three-year target to $100. According to Wells Fargo, the simpler, more profitable Citigroup could see its earnings per share double from $5 to $10.
Mayo and his team's outlook may not be too far off. Citigroup trades at a steep discount to its peers due to its disappointing profitability metrics. Today, Citigroup stock is priced at a 37% discount to its tangible book value. In comparison, Bank of America and Wells Fargo are both priced at a 44% premium to tangible book value.
C Price to Tangible Book Value data by YCharts.
Following its multiyear transformation, Fraser and Citigroup aim for an 11% to 12% return on average tangible common shareholders equity (ROTCE). If it can accomplish this transformation successfully and get its profitability metrics closer to peers, there is good reason for the bank to trade at a higher valuation.
During the Goldman Sachs U.S. Financial Services Conference, Chief Financial Officer Mark Mason said he expects Citigroup to complete its reorganization by the end of the first quarter.
Is Citigroup stock a buy today?
Citigroup presents an intriguing opportunity both for value investors and dividend investors. The stock has gained nearly 45% over the past couple of months but is still relatively cheap from a valuation perspective. Priced below tangible book value, it provides value investors with a margin of safety and solid upside potential. It also yields 3.9% with a modest payout ratio of 38%, or the share of net income a company pays in dividends.
Investors will want to closely monitor ROE and ROTCE metrics for Citigroup over the next several quarters to see whether it is gaining ground on its peers. However, considering its steep discount, today may be a good time to scoop up some shares and add more later, as long as its restructuring plans continue to bear fruit.
