Citigroup Bullish as Energy Portfolio Risk Declines

Citigroup Bullish as Energy Portfolio Risk Declines
March 15, 2016

Following the Fed rate hike in December 2015, the banking behemoth Citigroup (NYSE:C) lost more than 30.1% of its share value to hit a new yearly low of $34.52 in February, 2016. In fact, Citigrop is the worst performer in the banking sector.

Firstly, the investors are worried about the loans given by Citigroup to oil and petro-product companies. It should be noted that Citgroup is not the only bank which is exposed to energy market risk. However, other banks have clearly provided the details regarding the total amount set aside for losses related to energy loans. Citigroup has only issued a statement saying that it has set aside $300 million, in the fourth-quarter of 2015, for energy loan related losses. The bank did not disclose the total amount set aside so far. Citigroup has an energy loan portfolio of about $21.2 billion. The bank indicated that it would suffer as much as $600 million in losses in the first half of 2016, if the price of oil remains below $30 per barrel. This raised concerns among the investor community.

Secondly, the market fears a global recession. Finally, on March 8, 2016, John Gerspach, the CFO of Citigroup, indicated that the first quarter earnings would not be encouraging. The statement continues to put pressure on the share price of the Citigroup.

However, things have changed largely in the past few weeks. The bounce back in crude prices has considerably reduced the possibility of huge losses in energy loan portfolio of the Citigroup. As far as recession fears are concerned, it should be noted that statistically the US economy grew 0.7% last year. Thus, recession fears are unwarranted. Furthermore, the unemployment numbers are extremely low and the job growth looks impressive. The durable goods order data for January hit a 10-month high. The US Fed officials have clearly stated that there is only a negligible risk of recession.

For the fiscal 2015, the bank recorded a net income of $17.24 billion or $5.40 per share. Still, Citigroup’s quarterly dividend is only $0.05 per share. The share price remains approximately 35% below the book value. Thus, common sense dictates that Citigroup would either increase the dividend or announce a share re-purchase program. Before announcing an increase in dividend or share buyback, banks should submit annual capital plans for approval by the regulatory authorities. Citigroup is not expected to face any problem with this. Thus, fundamentally, a trader can expect the stock of Citigroup to rise in the coming weeks.

Technically, the chart of Citigroup shows a support base at 40 levels. The main line of the MACD indicator is not only trending upwards, but also above the signal line. The main line of the MACD indicator is above the zero line indicating a positive bias.

Citigroup Technical Analysis - 15th March 2016

The uptrend may find a temporary halt at 48.50 levels, where the major resistance exists. Thus, purchasing a call option contract would be a better choice for a binary options trader. A mid-April expiry date and a strike price of about $45 would justify the trade.

Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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