Citi’s enhanced barrier digital securities on two ETFs offer timely bet on bank stocks

By Emma Trincal

New York, March 16 – With high levels of volatility in the current bear market, Citigroup was able to offer a note paying a guaranteed double-digit return even if the reference asset posts a deep decline at maturity via a worst-of on two correlated bank exchange-traded funds.

Citigroup Global Markets Holdings Inc. plans to price 0% enhanced barrier digital securities due March 27, 2023 linked to the worst performing of the Financial Select Sector SPDR fund and the SPDR S&P Regional Banking ETF, according to a 424B2 filing with the Securities and Exchange Commission.

If the final level of the lesser-performing ETF is greater than or equal to its barrier level, 70% of its initial level, the payout at maturity will be par plus 41%. Otherwise, investors will be fully exposed to the decline of the lesser-performing ETF from its initial level.

Beyond normal swings

“They’re really smart. Can you give me some of these? We should buy it and retire,” said a trader only half-jokingly.

“30% is pretty aggressive on the downside, especially three years out.”

He looked at a five-year chart and noted some of the widest price moves for the Financial Select Sector SPDR fund. Between November 2015 and February 2016, the share price dropped 18%. Between January and December of 2018, it dropped 26%. The fund has just incurred a 38% decline since the end of February, but this is in the context of a brutal and severe bear market driven by the coronavirus pandemic.

“And it hasn’t even priced yet? Of course, it’s not going to go down 30% three years from now. On average it has dropped less than 20% over short periods of time. A 30% from where we are now is not going to happen,” he said.

The other ETF, which is more volatile as it tracks the performance of banks with a smaller capitalization, had shown deeper moves.

Since its 52-week high of December, the fund has plummeted by 45%. But again, the decline is to be placed in the context of the Covid-19 stock market plunge.

“Both funds are in the same industry, and that means you’re betting on banks. They’re both the same thing. It’s less risky than getting exposure to two different sectors when you buy a worst-of.

“I love this trade,” he said.

Timely pricing

Dick Bove, senior bank analyst at Odeon Capital Group, said the timing offered great value.

The notes are set to price on March 20.

“If you’re going in three years and it’s pricing on Friday, assuming the market doesn’t go crazy on the upside with some massive short covering, you’re really getting an extraordinarily good return at a very deep bargain.

“Where else are you going to get 13% a year?

“In the next couple of years, I don’t think regional banks will go anywhere. You’re betting on the third year.

“Earnings are going to rise slowly...maybe 25% to 30% over the next two years.

“Bank stocks will stay under pressure during that time. Then they will recover in the third year,” he said.

This forecast leaves room for the price to move anywhere from minus 30% to positive. If growth is lackluster in the first two years, there is a possibility for the notes to outperform the ETFs given the 41% return at maturity.

“This is a reasonable bet. I’m not going to say ‘investment’ but as a bet, it’s very reasonable,” he said.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The Cusip number is 17328V5J5.

© 2015 Prospect News.
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