There is a good chance for the banking sector to outpace the broader indices in 2022, given that investors are looking to place their bets on value stocks in an inflation-driven macro-environment.
Further, the possibility of multiple interest rate hikes in 2022 should act as a tailwind for banking companies and improve their bottom lines going forward. Alternatively, higher interest rates might also result in tepid demand across verticals including mortgages, automobiles, and others.
Keeping these factors in mind, let’s take a look to see which between Bank of America (BAC) and Citigroup (C) should be on your buying radar right now.
Bank of America
Interest rates were near all-time lows for close to two years. But a volatile and uncertain global economy also meant loan demand was inconsistent. Despite a rise in unemployment rates amid the pandemic, shares of Bank of America have surged higher by 36% since the start of 2020. The stock has in fact gained close to 60% in the last 12-months.
In 2021, Bank of America’s performance was cheered by investors due to strong performance in its investment banking and corporate business segments. Further, reserve capital releases drove profit margins higher as expected loan losses did not materialize.
In Q4 of 2021, the loan balance for BAC was up 3% year over year while net interest income stood at $11.5 billion. Bank of America’s CFO Alastair Borthwick explained that the company’s balance sheet expansion in recent years has allowed NII to reach the same level which was seen during the last rate cycle, though rate hikes are yet to take place.
Borthwick also confirmed BAC management expects loans to grow by single-digit-percentages in 2022 which will be higher than the growth experienced prior to COVID-19. The banking giant also claimed a 1% move in interest rates would allow it to increase NII by an additional $6.5 billion in the next 12-months.
Citigroup
In Q4 of 2021, Citigroup reported revenue of $17.02 billion and adjusted earnings of $1.46 per share. Analysts forecast the company to report revenue of $16.77 billion and earnings of $1.37 per share. In the year-ago period, Citigroup’s sales and adjusted earnings per share stood at $16.5 billion and $2.08 respectively.
While Citigroup surpassed consensus estimates in Q4, investors were worried about a 26% fall in net income on the back of operating expenses and a pre-tax impact of $1.2 billion. While sales rose by 3.1% in Q4, the company’s operating expenses moved higher by 18% to $13.5 billion.
Citigroup also exited multiple markets in 2021. In the last year, it disclosed exits from 15 retail markets across North America, Europe, and Asia. During its Q4 earnings call, Citigroup confirmed the sale of its retail business in Thailand, Indonesia, Vietnam, and Malaysia to Singapore-based UOB (United Overseas Bank).
The verdict
Despite Citigroup’s lower valuation, the company’s recent exits and less-than-impressive profit margins, make it an unattractive bet. On the other hand, Bank of America’s wide economic moat and improving fundamentals, as well as its cheap valuation, should allow investors to beat the equity market in 2022.
Shares of Bank of America have gained close to 650% in the last 10-years in dividend-adjusted returns. Comparatively, Citigroup stock has risen by just 150% since January 2022. It's quite possible for this trend to continue in the near term.
BAC shares were trading at $45.86 per share on Monday morning, down $0.01 (-0.02%). Year-to-date, BAC has gained 3.08%, versus a -6.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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