Citigroup: Profit From Pandit's Mistakes

Nov.26.12 | About: Citigroup Inc. (C)

Vikram Pandit and John Havens aroused suspicion when they suddenly stepped down as CEO and COO of Citigroup (NYSE:C). This came as a surprise since Pandit had been promoting the strong earnings for the third quarter of 2012. Apparently, this success was negated by tensions between Citigroup's board of directors and Mr. Pandit. It seems as though Mr. Havens sided with Mr. Pandit who had personally chosen Mr. Havens to be the president. This division resulted in the resignation of President and COO John Havens and Vikram Pandit.

The market has not reacted appropriately do this development. Key people resignation is not a good omen for a firm's stability nor for its future profits. Investors should wait for some bad news to sink in before even considering taking a long position in Citigroup.

Citigroup CEO and COO Step Down

Vikram Pandit led Citigroup through the 2008 multi-billion dollar U.S. bailout. While the U.S. Treasury held a large stake in the company, the last of its holdings were liquidated before 2011. At present Citigroup is recovering and restoring its global empire, work continues on bringing it back to its former stable, profitable state.

Vikram Pandit had stayed on top through thick and thin. During Pandit's five years with Citigroup, the group's stocks fell by 90 percent, and the once-high annual dividends per share went down to almost zero from the all-time high of $5.40 a share. Yet he left the firm at a time of apparent quiet.

Michael Corbat will take the place of Pandit at the helm of Citigroup. Mr. Corbat brings his experience in the burgeoning economies of the Middle East, his experiences in the volatile European marketplace, and his Harvard education.

Citigroup's Board of Directors released a statement that detailed how it respected Pandit's decision to leave. Analysts speculate that Pandit and Havensleft Citigroup due to the fact a recovery represents the beginning of a new era at the firm. Both men no longer had to guide the company through bad times. This was confirmed later in statements made by Pandit, who said that he had pondered departure for some time, and that the right time had arrived for him to leave Citi.

While publicly Pandit left without a fuss, there are accounts which suggest that Citi's board clashed with its former CEO about corporate strategy. The board had apparently pushed Pandit out based on his poor performance, a claim that has been denied by Pandit himself in various interviews.

Limited Fallout

So far there have not been news reports of many executives leaving the firm.

One executive who left was Citi's former Head of Equity Sales for Russia Ian Colville. Mr. Colville finally decided to resign after two years in the position as Citi in Moscow is currently encountering financial problems related to falling revenues and narrowing margins. This led to scaling down of Citi's investment banking operations in Russia. However, Mr. Colville did not elaborate further during a phone interview on the reason he is quitting. Ian Colville joined Citigroup (C) last September 2010 after working as a fund manager in Carpathian Capital Management. He had also a stint as Head of Equity Sales in Deutsche Bank (NYSE:DB) in Moscow.

There do not appear to be any ulterior motives hear, and there are other financial companies facing problems with their Russian operations. ING Groep (NYSE:ING) said it will shut down its Russian securities operations after UniCredit (OTCPK:UNCFF) announced this year that it would close its equity unit in Russia.

Citi's leadership change did not cause an employee exodus. This could be because there were no underlying problems at the firm, or because bank employees are hesitant to quit in the current labor market.

Management Change

The opacity of bank financial statement makes the resignation of key people in the firm especially important. I can't place much faith in bank financial statements due to mark-to-model accounting. Hence, I am stuck watching what people do who can see inside the black box. When they sweat, I get nervous. When they leave, I get even more nervous.

With this in mind, I don't think the market has fully digested the loss of Citigroup's CEO and COO. I would not buy shares at these price multiples until it is clear to me that the market had priced this in.

Valuations

There are few large cap banks with price-to-sales ratios near Citi:

Ticker

Company

P/E

P/S

P/B

P/FCF

(NASDAQ:BPOP)

Popular

12.22

1.12

0.49

2

 

Citigroup

15.13

1.53

0.57

5.72

(NASDAQ:FCNCA)

First Citizens Bancshares

11.9

1.71

0.87

4.29

(NYSE:SNV)

Synovus Financial

28.5

1.73

0.62

NA

(NYSE:BAC)

Bank of America

26.75

1.76

0.44

2.98

(NASDAQ:ZION)

Zions Bancorp.

19.64

1.76

0.62

5.63

(NYSE:STI)

SunTrust Banks

8.93

2.45

0.72

9.87

(NYSE:JPM)

JPMorgan Chase

8.64

2.69

0.81

2.86

(NYSE:PNC)

PNC

11.12

2.73

0.75

4.72

(NYSE:BBT)

BB&T

11.2

2.86

0.97

9

(NYSE:KEY)

KeyCorp

9.5

2.87

0.76

22.36

(NYSE:WFC)

Wells Fargo

10.32

3.54

1.13

8.23

(NYSE:STT)

State Street

11.49

6.91

1.02

10.71

Click to enlarge

Citi does appear cheap on a price-to-sales and a price-to-book basis. Is it a bargain? No.

Conclusion

If you are compelled to buy bank stocks, Popular is your best bet in terms of valuation. If you are looking to buy Citi, wait for its price to fall upon news of a write-down or some other management announcement which tries to assign losses to past management mistakes. If the stock price sinks in response to such an announcement and the stock is trading at lower multiples than its peers, then it would be one of the better bank stocks. You should wait for this to transpire because the option of blaming the last guys and realizing losses is very, very tempting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.