CITIGROUP STANDS TO WIN FROM MEXICO TRADE DEAL / BARRONS MAGAZINE

Citigroup Stands to Win From Mexico Trade Deal

By Andrew Bary


Investors have seen Citigroup’s international exposure as a negative this year. Photo: Callaghan O’Hare


Citigroup (ticker: C), owner of the second-largest bank in Mexico, stands to gain from the U.S.-Mexico trade accord that President Donald Trump announced Monday.

The stock closed up $1.72, or 2.4%, at $72.39, leading a strong banking sector. The group was up about 1%, as measured by the KBW index of 24 bank stocks.

Wells Fargo Securities analyst Mike Mayo wrote in a client note that Citi’s shares have been depressed this year by tension over trade between the U.S. and Mexico. Monday’s agreement should improve sentiment on Citi stock, which is down about 3% this year, making it one of the worst performers in the KBW index, he said.

“At a minimum, any new trade deal could reflect the absence of a negative and, on the upside, new potential growth opportunities,” Mayo wrote. Citi is Mayo’s top pick in the sector; he has assigned the company an Outperform rating, with a $100 price target.

In terms of deposits and branches, Citigroup’s Citibanamex is the No. 2 bank in Mexico, ranking behind BBVA Bancomer, a unit of Spain’s BBVA Group (BBVA). The Citi unit has $72 billion of assets and almost 1,500 branches, accounting for about 20% of Citi’s global consumer bank, Mayo says.

Mayo wrote that Citi is spending about $1 billion to upgrade its Mexican branch network. The Mexican unit has significant growth potential; the bank projects that annual revenues can expand 10% annually in the coming years, partly because the Mexican consumer banking system is less developed than the U.S. system.

Citi shares trade for one of the lowest valuations among major banks. They fetch about 11 times projected 2018 earnings of $6.56 a share and around 1.2 times tangible book value, a conservative measure of shareholder equity that excludes goodwill and other intangible assets. By contrast, Wells Fargo (WFC) and JP Morgan (JPM) trade for about twice tangible book value.

Citi’s lower valuation reflects a weaker return on equity than several of its main rivals. Citi shares yield about 2.5%.

Citi, which gets about 40% of its consumer-banking revenues from outside the U.S., has the most international exposure among its peers, with franchises in Asia and Latin America. While that global footprint sets the bank apart from its counterparts, it has been viewed as a negative this year. Investors have favored U.S-centric institutions, given the relatively strong American economy and international trade tensions. 
Reduced trade friction between the U.S. and Mexico would bolster the case for investing in Citi, an argument that already includes improving returns, ample stock buybacks. and its low valuation.





Citi got regulatory approval in late June to repurchase as much as $17.6 billion in stock over the 12 months ending in June 2019. That could result in the repurchase of almost 10% of its shares outstanding if fully executed, marking one of the most aggressive share buybacks in the industry.