The current environment of high interest rates is not boding well for most companies. However, financial services giant Citigroup (NYSE: C) is benefiting well from the situation. In fact, Citigroup’s Global Head of markets also recently acknowledged that “volatility is basically our friend.”
However, how far can the company benefit from this volatility? This question can be answered in brief. Nonetheless, it is prudent to consider all possibilities and outlooks before coming to any conclusion about a stock.
Granted, the monetary tightening period will boost the firm’s net interest revenues for some time, but it is only a matter of a few weeks before these gains might start getting offset by other more significant concerns.
Moreover, the lower credit losses that Citigroup witnessed in the past year are not a secular trend and were a result of stimulus presented by monetary and fiscal policies to help the economy grow out of the COVID-induced recession in 2020.
RBC (RY) Capital Market analyst Gerard Cassidy pointed out a key concern in this regard. Although an uptick in credit losses will bring the metric to normal and manageable levels for Citigroup, a recession might lead to higher-than-desired credit losses, hurting the bottom line.
“We believe aggressive monetary tightening by the Federal Reserve that results in driving the U.S. economy into a recession in 2022 is the key risk for the company and our rating and price target. A recession would bring on elevated levels of credit losses, which would depress earnings,” noted the analyst, reducing his price target to $60 from $65 per share.
Looking Beyond 2022
Nonetheless, Cassidy was optimistic about Citigroup’s longer-term prospects, leading him to reiterate a Buy rating on the stock. Citigroup expects to meet various key medium-term profitability targets under the leadership of the new CEO, Jane Fraser.
Cassidy also believes that Citigroup has solid chances to benefit from the growth of emerging markets over the long term as more than 50% of the firm’s revenues come from out of North America.
The analyst believes that Citigroup is aware that it needs to scale its U.S. consumer business to attain sustainable long-term growth. This explains why the firm is investing heavily in that area. To that end, Citigroup launched the Custom Cash Card last year and, most recently, the self-directing investment digital offering. Nonetheless, there is still more room to scale.
“To narrow the profitability gap between its two large peers, Bank of America (BAC) and JPMorgan (JPM), in the U.S. consumer business, however, it will need to be more aggressive in building scale, in our view,” explained Cassidy.
Wall Street’s Take
Wall Street is cautiously optimistic about Citigroup, with a Moderate Buy rating based on seven Buys, seven Holds, and one Sell. The average Citigroup price target is $62.93, indicating upside potential of 34.3% from early-Friday price levels.
Being one of the most established players in the financial services sector, there is a good chance for Citigroup to navigate the near-term risks to its growth.