We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Citigroup Inc. (NYSE:C) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A team of financial advisors huddled around a desk, discussing the best investment strategy for their client.
Citigroup Inc. (NYSE:C)
Analysts’ Upside Potential: 13.36%
The third largest U.S. lender, Citigroup Inc. (NYSE:C), has headquarters in New York, was established in 1812 and offers financial services and products. The segments that it operates through include Corporate/Other, Institutional Clients Group, and Global Consumer Banking.
Citigroup Inc. (NYSE:C) earnings for the second quarter of 2024, are comfortably above analyst consensus projections for both revenue and earnings, powered by strong performance in Markets and Investment Banking, which reported YoY revenue increases of 6% and 38%, respectively. Shares fell by about 2% in spite of the impressive results, though, amid investor worries about expenses, dividends, and market share and as Citigroup issued a warning that costs for FY 2024 may come in at the higher end of the range.
Diamond Hill Capital Long-Short Fund stated the following regarding Citigroup Inc. (NYSE:C) in its first quarter 2024 investor letter:
“Other top Q1 contributors included Meta Platforms, Citigroup Inc. (NYSE:C) and Walt Disney. Banking and financial services company Citigroup’s restructuring efforts are ongoing, and it continues remediating regulatory issues and building capital in anticipation of increased requirements. The company expects to see expenses fall meaningfully in the second half of 2024, bolstering the outlook from here.”
It is anticipated that the company’s strategic measures, such as its exit from foreign markets and its improvements in efficiency, will propel future development and profitability.
The improved results came two days after US regulators penalized Citi $136 million for making “insufficient progress” in resolving data management issues revealed in 2020. The lender had to prove to regulators that it was dedicating enough resources to those initiatives.
Citigroup continues to confront regulatory obstacles, including recent fines, which may impede its ambitions to undergo a more comprehensive transition and increase expenses. As a result, the possibility of additional cost overruns combined with the higher-end expense projection could put pressure on profitability. Furthermore, a slow recovery in particular business segments, as well as reliance on buybacks as a catalyst, may limit the turnaround strategy’s effectiveness if economic conditions worsen.
The Hold recommendation on Citigroup by DBS analyst Lim Rui Wen reflects worries about the company’s lack of near-growth catalysts, continuous restructuring, regulatory scrutiny, and high investment costs, all of which are predicted to hinder short-term financial performance.
However, it is one of the Best Financial Services Stocks To Buy Now since 15 analysts have given an average price target of $67.2 and an upside potential of 13.36% from the current stock price of $59.28. Analysts have rated C as a “buy.” Analysts considered 2024 a transitional year for Citi, as the company becomes leaner under CEO Jane Fraser’s turnaround.
Overall C ranks 4th on our list of the best financial services stocks to buy. While we acknowledge the potential of C as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than C but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.