Citigroup looks stuck with a crisis discount

Bank of America and Citigroup are offering a history lesson. A decade after the last big financial crisis, the $290 billion lender run by Brian Moynihan sports a big valuation premium to Michael Corbat's $170 billion bank. Yet even though BofA cranked out $6.5 billion of second-quarter earnings and, with a 10.75 percent annualized return on equity, bested its rival's, analysts expect the two to post remarkably similar annual returns for the next couple of years. In the eyes of investors, Citi seems unable to shake off the taint of its past mistakes.
While the 2008 crunch almost sank both institutions, Citi has far more errors in its past than BofA, having been hit by most major financial shocks since Latin America's 1980s debt crisis. Both banks, though, have spent the past 10 years overhauling their businesses and the processes that underlie them. And more stringent regulatory oversight means they - and the rest of the industry - ought to be safer when the next crisis hits.
Sell-side analysts have the two banks in virtual lockstep. Each is expected to earn a return on equity of just under 9 percent this year and 10.5 percent next year. BofA shares, though, trade at a 20 percent premium to book value, whereas Citi stock still languishes just below the net worth of its assets, according to Eikon data.
BofA is expected to edge ahead on returns in 2020 - but not by enough to justify the valuation gap. Meanwhile Citi's US credit-card business has faced "headwinds," as Chief Financial Officer John Gerspach put it on Friday, with problem loans growing. But these are still at pretty low levels, and Citi is far smaller in domestic retail markets than BofA.
Granted, escalating trade wars may hit the top and bottom lines of an international bank like Citi harder. But quantifying the pain to financial-services firms is not easy. The topic didn't even come up on Citi's earnings call on Friday, while JPMorgan finance chief Marianne Lake called it "more of a risk narrative than it is an actual driver."
It could be simply that shareholders see a better future for BofA than analysts do. But the message for Corbat at Citi may be that investors still aren't ready to let him escape his predecessors' wrongdoings.
Bank of America on July 16 reported second-quarter net income applicable to shareholders of $6.5 billion. At 63 cents a share, earnings beat the consensus estimate of sell-side analysts of 57 cents a share. Annualized return on equity for the quarter was 10.75 percent. Revenue of $22.6 billion beat the analysts' estimate of $22.3 billion. Citigroup reported its second-quarter results on July 13.