Attractive valuations signal further uptrend in Citigroup

In the first two months of 2016, the share price of the banking and financial services corporation Citigroup Inc. (NYSE: C) fell nearly 30% to touch a low of $36.98.

However, improved performance in the last two quarters enabled the company to regain most of the lost ground to close at $47.05 yesterday. Now, the question that arises in one’s mind is whether the stock will be able to rise or even break the 2016 high of 51.50. A look at the recent developments in the US banking industry and the overall global economic situation would enable us to assess and arrive at a decision.

The Manhattan, New York-based company’s second-quarter revenue of $17.548 billion was above the Wall Street analysts’ estimates of $17.469 billion, but below $19.470 billion reported in the similar quarter of 2015.

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Similarly, Citi’s Q2 2016 adjusted net income was $3.998 billion or $1.24 per share, down 14% from $4.8460 billion or $1.51 per share in the corresponding quarter last year. The analysts surveyed by Thomson Reuters anticipated Citi to post earnings of$1.10 per share.

In spite of the historically low interest rates, Citigroup managed to generate a 0.98% return on assets and a 7% return on equity. At the Barclay’s conference held on September 12th , John Gerspach, the CFO of Citigroup stated that the bank’s trading revenue is expected to rise by mid-single digits in fiscal 2016. Trading revenues account for 27% of the bank’s total revenues. A rise in the mergers and acquisitions activities indicates that Citigroup would post better investment banking revenues in the third-quarter.

Traditionally, consumer banking business has been the strength of the Citigroup. According to a UBS analyst, the Costco portfolio acquisition, which was completed in June, resulted in $0.70 billion and 337,000 new accounts for the bank in the second-quarter. The analyst anticipates an addition of another $200 million to the top line of Citigroup in the third-quarter. Furthermore, the quarterly dividend was more than tripled to $0.16 per share. Citigroup also increased the share re-purchase program to $8.6 billion, following the successful completion of the stress tests.

Usually, banks trade at 1x to 2x of their book value. The price to book value of Citigroup is 0.6455. This means that the shares are available at a cheap rate. Considering the higher non-interest trading income, lower operating expenses and attractive valuations, we anticipate the stock to remain bullish in the current quarter.

As indicated in the price chart, the stock is moving within an ascending channel. The next resistance for the stock is at 52.50. On the downside, support can be anticipated at 43 levels. The rising stochastic oscillator, with a reading of about 43, indicates that the stock has just begun its uptrend.

Thus, a binary trader can bet on a one touch call option to profit from the forecasted rise in the share price. The trader can pick up the call option contract as long as the target price does not exceed 51. Likewise, a time span of at least four weeks should be allowed for the expiry of the call option.