Ever since the financial crisis of 2008, almost every major company in the financial industry has virtually lost all of its market value. The fall of the Lehman brothers had a significant impact on the global network of our financial exposures, leaving a lot of people jobless and the economy crippled.
Big banks had substantial exposures on the practically twopenny-halfpenny mortgage-backed securities, or MBS, that ultimately led to the decline of the credit and banking industry. Most banks resorted to expanding their businesses and portfolio in emerging markets after the crisis. In the hopes of finding higher yields and a more acceptable return, Citigroup Inc. (NYSE:C) has expanded their business overseas.
Direction of the emerging markets
The last financial crisis that occurred five years ago triggered a worldwide debate regarding the health of the US economy as currencies congregated toward emerging markets. The bursting of the housing bubble caused the values of securities tied to the US real estate market to plummet.
Investors were shocked that the US economy stumbled, which forced them to look for alternative investments outside the developed countries. It led to the return of providing the most basic function of a security– providing acceptable returns.
Recently, emerging markets tumbled against the dollar as the US economy showed strong indicators of future growth and improvement. The bright prospects of the US economy have restored investors’ confidence in the financial institutions, and analysts are reporting higher targets for most of the financial institutions.
Bank of America Corp (NYSE:BAC): Analysts are giving this giant bank a target price of $13.46 compared to its current price of $12.86. Bank of America has a large asset base, with $1 trillion in deposits. The bank has been able to lower its loan to deposit ratio year over year. Analysts are expecting revenue and growth boosts ahead.
HSBC Holdings plc (ADR) (NYSE:HBC) is expected to reach a price level of $62.21 from its current market price of $51.90 by the year end. HSBC, one of the largest global banks, has a good loan to deposit ratio (less than 80%).
This deposit-led bank has focused on its growth from emerging markets. HSBC sourced 26.6% of its profit from Hong Kong in 2011, whereas this ratio has increased to 31% by now. Given the tremendous growth this bank claims from Asia, there is no stopping this one.
Citi’s overseas business perks
Citigroup Inc. (NYSE:C) is expected to end up at a level $55.69 despite its current price level of $47.97.
Citigroup’s extensive overseas business has given the company a sizeable exposure in the global economy. If the global economy grows, then those exposures can maximize the growth and returns of Citigroup Inc. (NYSE:C). But the more important part is if the global economy falters, Citigroup’s hedged positions in the capital ratios and security placement will offset the currency risks.
According to Bloomberg analysts, Citigroup will continue to generate more earnings because of the positive outlook in the US economy and emerging markets. Even if foreign currencies move against the company, the regulatory capital this year will remain fairly stable. This, dear investors, makes Citigroup a very attractive stock from a macro and fundamental perspective.
Market Performance
The chart above shows the year-to-date performance of Citigroup parallel to the NYSE composite. We all know the effect of the financial meltdown in 2008 that stripped the value of Citigroup Inc. (NYSE:C) from a high of $206.50 to an extremely low $10.20; however, it appears that the housing industry has hit a bottom in 2012, and is on its way to a recovery.
The housing industry has outperformed the market by 17.16% this year, and this will most likely continue as analysts estimate increased earnings for the entire year. The most important sign of this recovery is that the US pending home sales index is showing a rapid increase as more customers are planning to buy previously owned homes due to their more affordable price.
At the same time, a report by Freddie Mac (FMCC) suggests that prices are rising but the level of activity, specifically in the most affected areas, is still low. Therefore, I predict that there is still enough room for a moderate and sustainable growth in the market due to increased economic stimulation and stronger demand. The surge of the market marks the start of a bullish momentum for companies that thrive on these kinds of securities.
The decision of the company to expand their business overseas is a great measure of control against the future volatility of the market. The company’s business and financial risks would have been magnified had it concentrated their business in the US economy. Based on my observations and predictions on market performance, I have a favorable and bullish outlook for the performance of Citigroup’s stock for the next couple of years.
Conclusion
According to my analysis above, Citigroup Inc. (NYSE:C) has already managed the risks involved in their exposures in emerging markets. Specifically, the management of one of the largest banks in the world already hedged the company’s capital ratios to minimize the risk impact of the foreign-exchange rates. Hence, the biggest concern of the direction of emerging markets in relation to the business exposures of the bank has already been dealt with properly. Moreover, the recovering book value and capital ratios make Citigroup a fundamentally viable vehicle of investment. I rate this stock as a Buy.
quratulain kamila has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co..
The article Citigroup’s Overseas Business originally appeared on Fool.com.
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