By Steven Edwards
Citigroup (C) is a behemoth-sized corporation created through one of the largest mergers in history, when Citibank was married to the Traveler's Group conglomerate to create what was then the largest financial firm in the world. That merger was overseen by deal-maker and empire builder Sandy Weill. Though no longer the CEO, Weill made some waves in July of this year when he said on CNBC that it was time to break up the big banks. "What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that's not going to risk the taxpayer dollars, that's not too big to fail," said Weill. This, of course, was highly ironic in that Weill probably did more than any other single person to force repeal of the Glass-Steagall act, which had formerly prevented deposit-taking banks from getting into the investment world.
Now the nuns say that it is time to break up Citigroup, in particular. Trillium Asset Management LLC, on behalf of the Benedictine Sisters of Mount St. Scholastica and the Afscme Employees Pension Plan, who together own $9 million worth of Citi shares, submitted a proposal to the board to consider breaking up the company.
Citi has already sold off $600 billion in holdings since the 2008 credit crisis began and is still selling off assets. For instance, it was recently reported that Citi's interest in Grupo Aeromexico is on the block (so why does a U.S. bank own a Mexican airline anyway?) Citi is also shutting down half of its Greek banking business, and trying to find a buyer for the rest (not likely, as the Greek crisis, or rather, the European crisis continues).
Still, the problem for Citi's shareholders is that the market says the banking giant is worth just over half of its book value. By contrast, Wells Fargo (WFC) is worth 1.2 X book, JPMorgan Chase (JPM) is at 0.81, the same as Goldman Sachs (GS), and even Bank of America (BAC), after all its lawsuits, is valued at more of its book value, at 0.67 than. Breaking up the Citigroup could possibly unlock many billions of the unrewarded value of the company for its shareholders.
Trilllium did not say how, exactly, it thought that the Citigroup should be divided. The company's core consumer banking divisions are divided up organizationally into four regions: North America, EMEA (Europe, Middle East and Africa), Latin America, and Asia. Consumer banking includes consumer loans, deposits, and a whole lot of credit cards. Citigroup also has a Securities and Banking division, which deals in underwriting and other investment banking activities. A Transaction Services division does securities transaction processing for multinational and government accounts. Finally, there is a Citi Holdings division, which seems to be a catch-all division for everything else that Citigroup is involved in.
The most logical split, perhaps, is between consumer banking, which provides almost half of the revenue and everything else, which includes the riskier investment banking business. This would satisfy Weill's belated concern for the American taxpayer. If the consumer banking side was given a Wells Fargo type multiple, the consumer side would be worth way more than half of the total. Trailing 12 month income for global consumer banking was roughly 8 billion. Wells Fargo's PE multiple is 10.4, so the worth of that division on its own might be 83 billion, which is about 80% of Citi's current $105 billion market cap.
But there is a large difference between Wells Fargo and Citi in the mix of consumer banking that they do. Wells Fargo is the biggest mortgage loan provider among the big banks, with almost three times the market share that Citibank has. Citibank is the second largest issuer of credit cards in the U.S. after Bank of America, with about $150 billion in credit card debt outstanding. Wells Fargo, by contrast, has issued only about $35 billion in credit card debt. The banks, of course, charge ridiculous rates of interest on credit cards, so it is a great way to make money when times are good, but since credit cards tap unsecured lines of credit, the default rate is very high when the economy gets dicey. Even after the subprime debacle of 2008, lending on real estate is inherently less risky than lending on plastic. Which is why Citigroup is not going to get a Wells Fargo type multiple, even on the consumer side of the split.
Citigroup is number 4 on the list of stocks most owned by hedge funds, and the most popular of the our large banks in the top ten, which also includes Bank of America, Wells Fargo, and J.P. Morgan. Louis Bacon's Moore Capital Management has been adding to its Citigroup position recently, and now owns 5.3 million shares. So perhaps these experienced investors see Citi moving closer to its book value.
Should Citigroup be split up? In the interests of ending too-big-to-fail banks, I think that it should be. Would I buy Citigroup on the prospect that the pieces would be worth more than the whole? I don't think so. Trillium notwithstanding, the likelihood that Citibank will be split is small. Most likely, it will just continue to shrink as it sells off non-core assets. Eventually this will yield a smaller, more profitable, more stable bank, but there are still a lot of write-offs before it gets there, and the book value will shrink as well.