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In the earnings preview written late last week on what was expected for the two banking giants Friday morning, July 12th, ’24, neither offered any real surprises. At one point, in the earnings preview, it was written that ”if there were two opposites in the large-cap, money-center bank universe, it was Citigroup and JPMorgan” and that remains the case.
Most pair trades in the hedge fund world, are “long one stock, short another” maybe in the same sector, but for long-only investors, a good “pair trade” is the discount-to-book-value appeal of Citigroup (NYSE:C), with a similar long in the growthier, very well-run, JPMorgan (NYSE:JPM) stock.
The metric which indicates the substantial operational differences between the two banks is the ROE (return on equity) or what is now the ROTCE (return on tangible common equity), which for Citigroup is high-single digits, but for JPMorgan is in the low 20% today.
JPM is “winning” for its shareholders, while Jane Fraser continues to turn around Citigroup.
JPMorgan summary
Coming into last Friday morning’s call, our revenue estimate (per LSEG) was $42 billion and change, but that estimate was actually revised up on Thursday, the day before the earnings release, thanks to the release of the one-time, non-operating Visa (V) gain of $7.9 billion, which brought the consensus estimate up to $49 billion and change, versus the actual $49.87 billion in net revenue for JPM. EPS beat by 5%.
While forward estimates are “ex-Visa” it’s interesting that JPM’s expected EPS growth rate jumped from +2% per the earnings release to an expected 12% in full-year ’24. The stock is trading at 12x expected ’24 EPS, on expected revenue growth of 5% this year, up from an expected 1% two quarters ago.
The one interesting aspect to emerge in the last week was likely Republican Presidential nominee Donald Trump saying he would consider Jamie Dimon for Treasury Secretary if Mr. Trump is elected. In the earnings preview, it was noted an investor should consider that Jamie Dimon will likely be leaving the bank in the next few years, but this admission by nominee Trump accelerates that consideration.
Morningstar assigns a “fair value” to JPM’s stock at $168, while my own valuation model has a fair value estimate of $239, which (to be fair) can be volatile each quarter, (meaning the fair value estimate that my own model spits out can be volatile) so looking at a 4-quarter average for JPM, the model valuation estimate is $212.
Everything is going right this year for JPM, i.e. it has excess capital, and bought back $5.2 billion in shares in this last quarter, the Board raised the dividend, the capital markets are a tailwind, credit is still – for the most part – not an issue, with the only worry point now being that if nominee Trump is elected President, maybe Jamie takes the job.
JPMorgan is a much better operator than Citigroup, but it also trades much closer to full value at any given point in time. JPM’s book value (BV) and tangible book value (TBV) consistently trade around 2x.
Citigroup summary
Citi’s net revenue grew 3% YoY, while EPS grew 14% YoY, with an 8% EPS upside surprise, (not too shabby) as “markets” revenue – 25% of total net revenue, grew 24% YoY, along with operating income growing the same amount.
If readers peruse the earnings preview again, it was noted that Street consensus had 25% EPS growth slated for Citi in ’25 and ’26; thus I was interested in seeing if and how those EPS growth estimates would change after the Q2 ’24 quarter, and as noted here, those growth rates didn’t change much at all.
- 2025’s expected EPS growth for Citi stayed at an expected 24% growth rate.
- 2026’s expected EPS growth for Citi was revised slightly higher to 25%, versus the 24% pre-quarter.
Citi is a much better value play than JPM at this point, given Citi trades at 0.66x book value of $99.70 and 0.75x tangible book value of $87.53.
This table highlights how Jane Fraser is already improving “net revenue per employee” which may not be a standard bank valuation metric, but demonstrates how Jane is improving productivity, but still has a ways to go:
Overall summary
Here’s how I look at both banks relative to the rest of 2024, and considering YTD returns: Citigroup is much more of a defensive play now, and if the S&P 500 or general equity market should see the typical July ’24 to early October ’24 swoon, Citi would likely hold up better than a JPM.
If the market’s 2nd half ’24 performance is anything close to the first half, I would expect JPM to outperform given its business model can capture so much more “economic alpha” than Citi is equipped to do today.
The chart of Citi shows it touched $80 per share in early ’18, early ’20 and then again in mid-’21, so it’s logical the stock could trade back to that level, since at that price it’s still under 1x TBV.
The speed at which Citi gets there is dependent on Jane Fraser’s continued expense reductions. Morningstar noted after the quarter that “continued expense diligence will be necessary for the turnaround to succeed” – which I thought was a perfect way to express the current state of affairs.
This is not advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. All revenue and estimate data is sourced from LSEG.com.
Thanks for reading.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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