Citi Worst Performer Amongst Banks, Can it Come Back?

US bank stocks have been on the back foot since Moody's cut the rating of several banks in August. Citigroup shares have seen the largest decline, nearly 14% down. Is it the canary in the mine?

Down the Grading Hole

On August 8th, Moody's took aim at the US banking sector, which had just reassured investors with relatively good earnings after passing the Fed's stress test. The rating agency downgraded 10 regional banks and put six big banks on watch negative. Interestingly, Citigroup was not among them. A few days later, Fitch made the matter worse, suggesting that it might be forced to downgrade major banks - this time including Citigroup - if industry ratings were cut even more.

In those circumstances, it's not surprising that bank shares in the US have been underperforming through the summer as investors fret over more Fed rate hikes. But Citi is the worst performer of the "big four", down almost 14% for the month about to end. This compares to JPMorgan, for example, which is down only 5.4%. The Dow Jones US Banking index is also down, but only 8.8% since a month ago.

Why Citi?

Citigroup's weakness is its strength. Unlike other banks, which have been relatively well positioned, Citi continues through a long-standing transformation. The bank is looking to cut costs and streamline operations, making it more vulnerable when investors are already worried about banks as an investment. The extra risk of buying a company divesting units, and looking to reshuffle its leadership is weighing on the stock price.

The bottom line for Citi is that its financial performance has been dragged down by slowing non-interest income. While interest rates are high, the bank can lean on NII for profitability. But, in an eventual scenario of rate cuts, fees and commissions would become a larger share of the company's profits. As investors mull the chance of a recession, Citi might see the largest drop in profitability in a scenario where the Fed was forced to cut rates. If traders expect a recession to be avoided, the bank might see some recovery - assuming it can get rising costs under control, which management thinks will come when it divests its non-core assets. That could take a while, and Citi might be the more vulnerable of the major US banks to a credit crunch.

Citi in Post-Triangle

Citi’s price action resembles a triangle breakout, with the typical measured-move target pointing to $36. However, from a technical standpoint, a new low under $40 would put a low in, making the four-dollar range a potential opportunity.

Without reclaiming $45, the chances of a reversal remain limited. Topping that off will open up $50 and the top at $55, which may signal further upside.

Source: SpreadEx / CITI Group

Key Takeaways

Citi has been the worst performer among US banks, with its shares down nearly 14% since Moody's downgraded several banks in August. While other banks have been relatively well positioned, Citi is going through a transformation process, which makes it more vulnerable. The bank is looking to streamline operations and cut costs, but this comes with the added risk of divesting units and reshuffling leadership, which has weighed on its stock price. Citi's financial performance has been impacted by slowing non-interest income, and if the Fed were to cut rates, it could see a significant drop in profitability. However, if a recession is avoided and rising costs are brought under control through the divestment of non-core assets, there is potential for recovery.