Reuters reported that the regulators fined five money center banks in the US for paying lobbyists using the funds from municipal and state bond deals. The payments made between 2006 and 2010 to California Public Securities Association were used to help influence the Financial Industry Regulatory Authority. The payments were inaccurately wrapped into bond-underwriting expenses. The banks involved, including Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC) and Morgan Stanley (MS) agreed to pay up to $3.35 million in fines besides reimbursing $1.13 million to certain California bond issuers.
Citigroup among the rest of the banks was slapped with the largest fine of $1.28 million, followed by Bank of America. Underwriters including Citigroup were found using taxpayers money for the same purpose last year, which is why after a probe they reimbursed the state of California $2.3 million. The practice was "improper, it will stop now, it will not happen again, and we will get our money back," California Treasurer Bill Lockyer said in February, 2011.
Citigroup has been reluctant in helping the Fed improve the US housing market. The bank has not fired up its mortgage banking segment, however, it still remains Morgan Stanley's top pick. Morgan Stanley upgraded the bank from equalweight to overweight. The ratings were changed on expectations of 3 additional rounds of cost cutting, which MS thinks are not priced it. The bank is expected to reduce headcount, right-size its branch network and exit low PBT businesses. This tightening would lead to another $1.9 billion cost reduction over the coming quarters. Among other drivers of future growth are declining credit costs and sale and roll-offs of assets contracting the balance sheet and boosting capital ratios.
Headwinds from Euro volatility, slowdown in Asia and rising losses in non-core businesses are the items that investors should keep an eye on before investing in the bank. Citigroup is scheduled to reports its third quarter results on January 17, 2013.
Adequate Capital Position
The bank improved its capital position as represented by its capital ratios. At the end of the most recent quarter, Citigroup reported tier 1 capital and tier 1 common ratios of 13.9% and 12.7%, respectively. This is an improvement from prior year's 13.5% and 11.7%, respectively. The bank also estimates Basel III tier 1 common ratio of 8.6%, 10 basis points above the regulatory requirements.
In comparison, Bank of America reported a tier 1 capital ratio of 13.64%, while the tier 1 capital ratio of JPMorgan at the end of the third quarter of this year is 11.9%.
Citigroup has attractive valuations compared to most of its peers in the US money center banks. The bank trades at 25% discount to its third quarter tangible book value, while Bank of America trades at 21% discount to its tangible book value. In comparison, JPMorgan and Wells Fargo trade at 17% and 66% premiums, respectively.
In conclusion, despite the latest fines imposed, Citigroup has attractive valuations, adequate capital base and promising outlook for the year 2013. Therefore, I recommend investors buy the stock.