Citigroup is now the darling of Wall Street
Citigroup was one of the hardest hit US banks during the 2008 financial crisis. But it's the king of Wall Street so far this year.
Shares of Citi have soared nearly 40% in 2019, outpacing the gains of big banking rivals JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo. But all these stocks, with the notable exception of scandal-ridden Wells Fargo, are surging this year too.
Citi will kick off bank earnings season on Monday when it reports its second quarter results. The other five megabanks all report next week too.
It will be very interesting to hear what Citigroup and other major banks have to say about the outlook for the global economy in light of the numerous trade skirmishes between the United States and other nations.
Concerns about China's slowdown and weakening growth in Europe could hit the international divisions of the big banks.
But back stateside, the economy is still humming along at a decent clip, wages are rising and the Federal Reserve appears ready to cut interest rates, which could hurt profit margins a bit but also help boost demand for mortgages — a good thing for the banks.
Banks get Fed's blessing for buybacks
The Fed also just approved the capital plans for Citigroup and most other big banks — a move that will allow these financial services firms to boost their dividends to shareholders and repurchase more stock.
Buybacks are cheered by investors because they lower the share count and boost earnings per share.
Just look at Citi, which recently announced plans to buy more than $17 billion in shares over the next 12 months, and also announced a 13% dividend hike after passing the Fed's latest stress tests. Citi's revenues are expected to be flat in the second quarter but analysts are forecasting a more than 10% jump in earnings per share.
JPMorgan Chase and BofA should also post solid earnings increases despite tepid revenue gains. And analysts are forecasting a solid jump in earnings for Wells Fargo even though the bank's revenues are expected to fall from a year ago.
The stock market remains near record highs — a boon for the big banks and their Wall Street units as well. That's because companies are taking advantage of this epic bull run to go public and make acquisitions.
"The capital markets have remained open and active despite the continued geopolitical uncertainty surrounding Brexit, tensions with Iran, trade with China and the like," said Mark Doctoroff, global co-head of the financial institutions group at MUFG, in a report.
Rate cuts should boost markets
The booming IPO market during the second quarter in particular — Uber, Pinterest and Chewy were among the highlights — helped lift stock underwriting fees by nearly 40% from a year ago, according to Refinitiv.
And that, says CFRA analyst Kenneth Leon, is great news for the top banks. He noted that Goldman Sachs, Morgan Stanley, JPMorgan Chase, BofA and Citi were the top five equity underwriters.
If the Fed cuts rates later this month — as widely expected — that could lead to further market gains and even more IPOs. It would help offset some of the sting that banks, particularly the ones with larger consumer businesses, will feel from lower rates.
It's harder to make money from loans when rates are low.
"Economic softening and 'low for longer' interest rates will again force banks to address subdued profitability, opening the door to further cost cuts and changes to business models," wrote analysts at S&P Global Ratings in a recent report.
Housing could rebound
But at the same time, low rates could also jump start the housing market, which has started to cool in recent months.
That would be great news for Citi, JPMorgan Chase, BofA and Wells since they also have massive mortgage banking units.
"Lower interest rates should preclude a widespread real estate meltdown," said KBW analyst Frederick Cannon in a bank earnings preview report.
"Higher interest rates slowed home sales early in the year. However with rates now lower the slowdown in home sales may abate," Cannon added.
MUFG's Doctoroff also pointed out that CIti and other big US banks will benefit from the fact that they've already made tough decisions to fix their balance sheets since the Great Recession — moves that haven't been made by many of their global counterparts.
The recent problems at Germany's struggling Deutsche Bank serve as a painful reminder of what can happen to a bank that doesn't have its own financial house in order.
"U.S. banks restructured their businesses much more extensively and quickly after the financial crisis," Doctoroff noted, adding that many European banks "have yet to complete their own restructuring. This is most evidently the case with Deutsche Bank, but it's endemic to a continent that is over-banked, where margins are just much weaker than in other developed regions."