U.S. stocks have been hitting fresh highs almost every day since Donald Trump’s election, with small-caps outperforming their large-cap peers. Some stocks and sectors have been particularly strong, including bank stocks.
Trump backed business-friendly (and fewer) regulations in his first term. The president-elect has tasked the newly formed Department of Government Efficiency (DOGE), headed by Elon Musk and Vivek Ramaswamy, with advising him on how to “slash excess regulations,” among other things.
Bank Stocks Could Shine During Trump's Presidency
While businesses generally love fewer regulations, the banking sector, in particular, stands to benefit from easing regulations, including those related to mergers and acquisitions. Bank stocks rallied in anticipation of a more relaxed regulatory environment in November and are looking on a firm footing for 2025.
The dividend yield of banks is typically higher than what an average S&P 500 Index ($SPX) constituent pays, and leading banks - including JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) - have a dividend yield in the ballpark of 2%. Citigroup (C), meanwhile, has a dividend yield of over 3.1%, which is higher than many of its peers. Moreover, the dividend bonanza for Citi investors might continue over the next couple of years. Goldman Sachs expects the bank to grow its dividend at a CAGR of 19% between 2024 and 2026.
The stock brings a combination of healthy dividend yield and strong capital gains. This is likely to continue through a mix of valuation re-rating and earnings growth over the next few years.
Citi Has Often Been in Regulatory Crosshairs
Citi, along with Wells Fargo, has been in the crosshairs of regulators a lot more frequently than other large U.S. banks. In July, Citi was fined $136 million for failing to fix issues related to data management.
Notably, in October, Senator Elizabeth Warren wrote a letter to Acting Comptroller of the Currency Michael Hsu, calling for growth curbs on Citi. She called it a perfect example of a company that is “too big to manage.” Warren pointed to the deficiencies in Citi’s risk management and compliance structure as well as data management issues.
However, Citigroup has been undergoing a transition to address its too-frequent regulatory issues. This transformation will raise expenses at the company as it strengthens its external controls, but management is still confident in meeting the 2026 expense guidance of between $51 billion and $53 billion.
Citi has a comfortable capital buffer and had a preliminary Common Equity Tier 1 (CET1) capital ratio of 13.7% at the end of September. The regulatory requirement beginning in October was 12.1%.
Citi’s Valuations Still Look Compelling
Citi has been trading below its book value for quite some time now, and even as the gap has narrowed over the last year, thanks to the rally in its share price, it is still significant. At the end of September, Citi had a tangible book value of $89.67 and a total book value of $101.91. In contrast, the stock trades under $72.
I believe there is still room for Citi’s share price to converge toward its tangible book value, which would help drive returns. Its book value would also grow as its earnings rise, which would help propel shares higher.
Another perk for investors is that Citi is working to improve its return on total capital employed (ROTCE) to between 11%-12% over the medium term – versus the 7% that it returned in Q3.
Citi Stock Forecast
Of the 19 analysts actively covering Citi stock, 10 rate it as a “strong buy” and 1 as a “moderate buy.” The remaining 8 analysts rate the stock as a “hold” or some equivalent. Citi’s mean target price is $75.81 which is just over 6% higher than Tuesday’s closing price. However, its Street-high target price of $110 is over 54% higher.
Investors should note that while Citi is likely to benefit from potentially relaxed regulations, it will not be able to escape internal compliance and data controls. If Fraser can deliver on these basics, Citi stock will be worth betting on.
I believe that Citi stock has room to run higher, given its still-tepid valuation. As it catches up with its bank stocks peers, it should be able to deliver to investors. The ball, however, lies in the court of Fraser and Co., who must see this transformation through.
