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Even Warren Buffett’s Berkshire Hathaway buys shares in Citi, a vote of confidence, if there ever was one.
Mario Tama / Getty Images
Bank stocks were affected as fears about the US economy grew. They are starting to look profitable and nothing more
Citigroup
.
IN
exchange traded fund (ticker: KBE) has fallen 20.4% this year, just under
S&P 500C ‘
22.9% decline. Trading and capital markets, which helped some of the largest banks make record profits during the pandemic, are drying up, while investors worry that banks will have to start accumulating depleted reserves.
Even the factors that were supposed to help the banks will still work in their favor. After years of low interest rates that reduced profits, higher interest rates had to boost profits. Instead, the bank’s ETF fell 3.8 percent on Thursday, a day after the Fed raised interest rates by three-quarters of a percentage point. It turns out that investors are less excited about the prospect of rising net interest income, when the Fed is expected to cause a recession.
This is a challenging economic background for banks, but they must be able to cope with it. This is not 2008, when financial performance was at the center of a global collapse. Even if the economy is in recession, banks are better prepared to deal with economic shocks than more than a decade ago.
Don’t take our word for it. This week, the Fed will publish the results of its annual stress test to assess whether the largest banks can absorb losses and still lend to households and businesses during a severe economic downturn. Analysts at Barclays expect them to pass the test easily, noting that the average bank it covers has capital levels 2.3 percentage points above the requirement set after last year’s test. Oh, and banks should be able to raise their dividends after the test, as the average bank is expected to offer a 4% return.
To top it all off, banks are cheap– Some of them are cheap.
JPMorgan Chase
(JPM) is trading at 1.3 times the book value while
Bank of America
(BAC) traded 1.1 times.
Goldman Sachs Group
(GS) trades at book value, which has historically been a good level for buying stocks.
And then there’s Citigroup (C). Shares fell 23% in 2022 to $ 46.54, and at 0.5 times the book value, this is the cheapest of the big banks – and the one with the most to adjust. At a time when bank stocks can be expected to move up and down in tandem based on the latest economic reports, solving Citi’s problems can stimulate superiority.
Not that everything is pink. In March, Citigroup unveiled a multi-phase strategy to streamline its operations and warned that costs would increase by 5% to 6% in 2022. It also said it would reduce the number of shares it expects to repurchase. This bad news now seems to be sealed in stocks.
The good news is not. Citigroup has also made progress with sales – early bids valued its Banamex unit at between $ 4 billion and $ 8 billion, according to reports – and the money could be used to increase buyouts. Even
Berkshire Hathaway by Warren Buffett
(BRK.B) was purchase of Citi sharesa vote of confidence, if there has ever been one.
Citi there are still many work to dobut at these prices, even a little good news can boost stocks.
Write to Carlton English c carleton.english@dowjones.com
