Citi remains bullish on passing the “Living Will” test

Last week, Citigroup Inc. (C), the fourth largest bank by assets in the USA, reported a 27% decline in the fiscal 2016 first-quarter net income. However, the share price closed almost flat at $44.92 on Friday. What is the reason behind the decision of the market participants to stay away from going short? An answer to this question will enable a trader to forecast the trend perfectly and place suitable bets with a binary options broker.

For the first-quarter, the Citi reported revenue of $17.56 billion, down 11% from the prior year corresponding period. The net income for the first-quarter stood at $3.5 billion or $1.10 per share, compared to $4.77 billion or $1.51 billion in the similar period of fiscal 2015. The revenue and earnings estimate of analysts’ for the first-quarter was $17.44 billion and $1.03 per share respectively.

By comfortably beating the analysts’ estimates, the stock surprised the market. This was the first reason for the share price to remain flat even after recording a decline in earnings, compared to last year’s corresponding quarter.

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Citi is taking all the necessary steps to clean up its balance sheet, which is its long-term goal. In this regard, the bank diluted 44% of its holdings (toxic assets) consisting of complicated derivatives, bonds and other assets. Due to this reason, last week, the bank was able to pass the Fed’s “Living Will” test. The test requires banks to prepare a workable bankruptcy plan as per the legal standard described by the 2010 Dodd-Frank law. Five big US banks failed the test which included Wells Fargo, who is largest holding of Warren Buffett .

During the first-quarter, the bank also set aside $233 million to cover energy loan risk.

Additionally, the bank also took one-time charges of $491 million, which includes severance payments for managers and staffs involved in trading. The share price of Citigroup is trading at about 37% below its book value. A profitable bank usually trades at least at a small premium to the book value. Thus, considering all these facts, the market participants were not willing to short the stock at this level. So, fundamentally, it can be argued that the share price would remain range bound with bullish bias.

The price chart shows that the stock has major support at 43 and major resistance at 53. The main line of the MACD indicator is above the zero level and the signal line as well. Furthermore, the stock is trading above the 50-day moving average. Thus, it can be understood that the stock is on a firm uptrend.

Considering the technical and fundamental aspects, a binary options trader should purchase a one touch call option contract with expiry in the third week of May. The strike price for the one touch call option contract should be preferably $50 or lower.

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