Citigroup (NYSE: C) is a hybrid organization that combines a bank and a credit card company.
Today, Citi; which is also known as Citibank, is primarily a credit card company. A good way to think of Citi is as a credit card company that also owns a bank.
The good news for investors is that Citi is very good at credit cards and customer service. The company will refund some money to 1.75 million customers that did not receive a planned interest rate reduction.
The refunds are coming because Citi forgot to follow a federal law that requires credit card issuers to check the Annual Percentage Rate (APR) every six months, Bankrate reported. That means the 1.75 customers will receive an average refund of $190.
Citigroup is making a lot of Money
The total amount of the refunds works out to around $332.5 million. Citigroup can easily afford to pay those refunds.
Citi had $202.704 billion in cash and equivalents on March 31, 2018. It also had assets of $1.922 trillion and just $201.915 billion in debt on the same day.
Citibank demonstrates why I like financial companies: they generate a lot of cash. Citi reported an operating cash flow of $6.956 billion, a financing cash flow of $47.363 billion, and a free cash flow of $6.088 billion for 1st Quarter 2018.
Citigroup was able to generate a lot of money off those cash flows. It reported a net income of $4.62 billion, an operating income of $6.09 billion, and a gross profit of $17.015 billion on March 31, 2018.
Citi is a Value Investment
Those figures make Citigroup a definite value investment because it was stock was trading at $68.52 a share on 10 July 2018.
More importantly, Citi paid a dividend of 32¢ on May 25, 2018. That dividend doubled in 2017, it was 16¢ on April 27, 2017.
Like a lot of financial stocks, Citigroup is undervalued. A big reason why Citi is undervalued is that the risks with it are pretty low.
Citi is selling a product almost everybody uses these days: credit cards. Around 75.7% of all American adults or 189 people, had at least one credit in 2017, Creditcards.com estimated. Those figures increase to 76.9% or 192 million Americans if charge credits are counted with the credit cards.
A charge card requires its holder pay the entire balance off at the end of the month. A credit card allows a holder to maintain a balance, upon which he or she collects interest.
More importantly for Citi, the average American was had 3.7 credit cards in his or her wallet in 2014. That figure was down from four cards in 2002 but it is still impressive.
The Threats to Citibank
The size of the credit market helps Citibank do a lot of business; it reported $18.872 billion in revenues for 1st Quarter 2018. Those revenues grew by 2.76% when compared to the $18.366 billion reported for 1st Quarter 2017.
Despite the growth there are serious threats to Citibank out there. The biggest of which are digital wallets like PayPal (NASDAQ: PYPL).
Digital wallets threaten credit cards because they encourage paying without plastic. A major threat is products like Apple Pay, PayPal’s Venmo, and Google Pay which let users choose from several payment options.
PayPal in particular, aggressively pushes its own financial products such as loans and credit cards through its digital wallet. Products like Alipay, Walmart Pay, and Google Pay rely on credit card and bank balances.
A bigger menace to Citibank is banks like Goldman Sachs (NYSE: GS) which are entering the credit card business. Goldman Sachs is offering a particularly dangerous product for Citibank, a credit card with the Apple Pay brand.
Citigroup is preparing for these changes, the company is reducing its brick and mortar footprint in Asia. Improvements in that region include on offering an all-digital application process for loans and credit cards. Many Asian banks still require a paper application for most products.
Investment Banking for the Masses
That card is aimed at younger consumers who prefer digital wallets to credit cards. A real danger for Citibank is Goldman Sachs combing credit cards with its Marcus suite of artificial intelligence (AI) powered consumer financial products.
Marcus is already powering credit card consolidation loans and savings accounts. The next logical step would be a Marcus app that provides instant access to a full suite of banking and investment services.
The real idea behind Marcus is to bring investment banking to the masses. Goldman Sachs is trying to create a mass market for investment banking in order to compete directly than Citigroup.
Goldman Sachs has the resources to build such a product, has 9,000 engineers on its payroll, CNBC reported. Engineers make up 25% of Goldman Sachs’ workforce.
To make matters worse, those engineers had $120.503 billion to play with. Goldman Sachs reported $120.503 billion in cash and receivables on March 31, 2018.
The purpose behind those engineers is to build a platform capable of serving a mass market on a global basis. The hope is to be able to deliver investment and banking services to everybody through your phone.
The products Goldman Sachs is investigating include cryptocurrency. Goldman Sachs has invested in the unicorn Circle, which owns the Poloniex cryptocurrency exchange, CNBC reported. The investment is exploring the possibility of trading cryptocurrency derivatives, Goldman Sachs Chief Operating Officer David Solomon told Bloomberg on June 20, 2018.
Finance is About to Explode in Value
These developments indicate that investment banks like Goldman Sachs and technology companies like Alphabet (NASDAQ: AAPL) will become direct competitors to Citibank. Citigroup has the resources to meet that challenge but brutal competition is ahead.
Watch finance carefully because this market faces severe disruptions. It will explode in value and change beyond recognition. Even with that turbulence, Citibank is still a value investment because it is posed to grow with finance.