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Citigroup (NYSE:C) reported an EPS of $1.06 for its fourth quarter earnings which was $0.02 higher than analysts expectations. Furthermore revenue also surpassed consensus coming in at $18.6 billion. But top and bottom line beats didn't stop the Citigroup stock from selling off after the earnings release. Citi stock as of today is down over 7% since earnings were announced on the 15th of January (see chart)

In a previous article here, I discussed why I believed Citigroup stock looked very cheap on a valuation basis. Well now as a result of the post earnings sell-off, the company's price to book ratio has dropped to 0.6 which is 30% lower than the industry average. There is no denying that Citigroup stock is cheap but sentiment rules on wall street and factors such as volatility in equity markets and the continuing oil slump are definitely weighing on Citigroup stock at present.

Citigroup is massively diversified across many international markets and whereby this usually would be considered a strength, it actually was one of the causes of the steep sell off post earnings. The Chinese stock market is down 14% since the start of the fourth quarter and since Citigroup is heavily exposed to emerging markets, sentiment turned bearish very quickly against the stock. Nevertheless banks are better capitalized now compared to 2007. Let's go through 3 positive items that came out of its fourth quarter earnings.

Declining Efficiency Ratio

Bears will point to the shrinking of the balance sheet and interest income but profitability at the firm remained elevated due to lower expenses. Non-interest expense came in at $11.39 billion which was well over $4 billion lower than Q4-2014. Legal expenses were also almost $3 billion down from the same quarter in 2014 coming in at $453 million which again aided the bottom line. Although the group's efficiency ratio was higher compared to the last quarter, it was substantially down from Q4-2014 and I believe the trend will continue.

If the group can report a 55% efficiency ratio number or lower for Q1-2016 (like it did in Q1-2015), it has to be bullish for the group going forward. Why? Well the efficiency ratio basically tells you if operating expenses are shrinking compared to top line numbers. The 55% figure is the optimum in this sector. Combing this with its low valuation as previously mentioned would be bullish for Citigroup stock going forward.

Strong Capital Adequacy

If you are an investor worried about Citigroup stock getting caught in a sharp fall in equities (something like 2008), well I just don't see it happening for a couple of reasons. Firstly central banks have demonstrated since 2009 that they will not allow deflation or falling equity markets. Therefore if we get a sharp fall in US equities, I for one believe it will be short as the Fed will again rescue the market.

Secondly the Fed has demanded that banks keep higher levels of capital on their balance sheets since the great recession. Well, the "leverage ratio" takes into account the quality of a bank's assets which is a sign of the company's financial strength. The Fed is looking for at least 3% from all major US banks and Citigroup comes in at over 7% (up over 20% in the last 12 months).

What does this mean for investors? Well in this space its the Fed which approves capital returns and with CCAR  (Comprehensive capital analysis and review) coming up shortly, I can't see the Fed getting in the way of Citigroup returning more to its shareholders. It returned $1.8 billion through share buybacks alone (5.7% annualized rate) and now would be a perfect time (as the Citigroup stock is undervalued) to start buying back more of its own stock.

Highly Diversified

Finally, I return to my diversification argument here when I say I still believe Citigroup offers both the best protection (hedge) against volatility across different markets and asset classes. The group was unfortunate this time as the three areas where its business is invested heavily in (the US, Emerging markets and Energy) suffered big losses in the 4th quarter of 2015.

These markets historically are not correlated so the chances of this happening again are very remote. Citi presently has almost $60 billion tied up in its energy portfolio (9% of its portfolio) and almost 40% of its revenues come from emerging markets which the market is taking as a negative but I see the diversification as a long term positive. Would you prefer to invest in a Wells Fargo (NYSE:WFC) which has only US exposure and has a much higher valuation?. I would recommend Citigroup. It has the fundamentals and once oil and emerging markets get in gear, Citigroup stock should rebound sharply towards its book value per share of around $70.

Conclusion

To sum up, Citigroup stock sold off after its Q4 earnings because of negative sentiment and not its financials. It beat consensus on the top and bottom lines, its efficiency ratio is getting better and its leverage ratio is now topping 7%. Fundamentally this bank is strong. Once sentiment resets, this bank will outperform other banks in its industry.