Citigroup (ticker: C) has been a disappointing stock for investors, and it has left Wells Fargo Securities analyst Mike Mayo puzzled. Since Jane Fraser took over as chief executive in March 2021, Citigroup's shares have plummeted by 37%. In comparison, the SPDR S&P Bank ETF (KBE) is down 21% during the same period, while the S&P 500 has gained 18%. To make matters worse, the stock is currently trading at around half of its tangible book value, reaching its lowest point since the global financial crisis.
According to Mayo, Citigroup's stock is "pricing in too much fear" and he believes that the market has oversold the company. He estimates that the tangible book value will increase from $85 to approximately $100 by the fourth quarter of 2025. Mayo maintains an Outperform rating on the shares and sets a $55 price target, suggesting a potential upside of 32% from recent trading levels.
Although Citigroup shares have underperformed in the past five years, with a 40% decline compared to the KBE's 20% drop, the bank's challenges predate Fraser's appointment. Following a series of missteps under its previous CEO, including missed financial targets and regulatory fines for risk management and internal control weaknesses, Fraser was brought in to lead a turnaround at the bank.
Mayo identifies several positives for Citigroup's stock. While many banks are being cautious about share repurchases due to recent failures, regulators have imposed higher capital requirements on the sector. However, Mayo expects that Citigroup's repurchases will account for 6% of the bank's market capitalization this year, increasing to 9% in 2024 and 18% in 2025.
Costs are also expected to be less of an issue for Citigroup as it continues its streamlining efforts under Fraser's leadership. The bank has already exited operations in 14 countries in favor of focusing on more profitable regions, ultimately increasing efficiency.
Moreover, Mayo finds comfort in the fact that Warren Buffett still holds shares of Citigroup. The endorsement from the Oracle of Omaha suggests that the stock may be worth considering for other investors.