Citigroup's (C) new CEO, Michael Corbat, is doing a good job as he turns the company around. With the new growth plan in place, the results of the recent stress test, and what looks like a "breakeven point" for Citi Holdings, we might have a nice looking bank investment for investors to consider.
Within the next three years Citigroup has a plan in place to become more profitable, raising its "Return on Equity" (ROE), by almost 26%. It plans to accomplish this by addressing three main areas:
- Modest revenue growth
- Address improvements that will make the company more efficient
- Deal with the challenges of Citi Holdings that continues to suck profits
Emerging Markets will be a Challenge
Citigroup is focused on investing in high growth emerging markets. In fact, 30% of Citigroup's revenue comes from these areas; areas such as Mexico, China, Singapore, Hong Kong, India. This may be a little bit more challenging for the company's 2013 than originally expected. In 2012 growth came in weaker than forecasted. Citi economists forecasted a 6% growth in the emerging markets but it only turned out to be about 4.5% and this is a huge difference. It appears that a sharp slowdown in credit growth has hit these markets like it had industrial countries earlier. The economic slowdown in China has also led to slower import growth that has reduced exports in countries it works with like Korea Taiwan and Brazil. There is more than enough liquidity in the global financial markets and monetary easing in the emerging markets that growth in these markets in 2013 should come. Economists are expecting about 5.3% growth and that should be followed by good earnings growth. If this doesn't happen it could threaten continued growth for Citigroup as it intends to focus on institutional clients in emerging markets more than general consumer business.
Developed markets like the United States and United Kingdom make up about 50% of the company's revenues but also come with a challenge of ballooning expenses because of the financial crisis they have gone through. There are some markets Citigroup deemed unprofitable and the company will scale back these markets significantly. In such areas as: Paraguay, Rumania, Turkey, and Pakistan, the company may keep an institutional client base but not general consumer business. By institutional clients I mean investment in corporate banking services and products for corporations, governments and institutions.
Citi Holdings, consumes about a quarter of the company's capital and this burden of a business has been winding down since 2008. Most of this "bad business" presently consists of U.S. mortgage loans. It already has plans to sell 1.5 billion in mortgages but it's going to be a gradual slow process. And this makes sense because the company is strategically and patiently waiting for prices to rise so that the liquidity discount will not be so great. I would expect to see losses from Citi Holdings to decline as prices stabilize and the economy picks up. If credit losses continue to decline with litigation expenses that are tied to the mortgage portfolio the holdings company could break even by 2015.
Citigroup's Stress Test
The Federal Reserve's latest Stress Test results have been released, and it appears most banks passed with healthy margins. The Dodd-Frank Act of 2010 mandated these tests for banks. They intend to test the bank under a severe economic scenario to make a determination as to whether or not bank's capital is enough cushion. Citigroup, which had a controversial score last year, some saying it passed and some it didn't, fared much better finishing in the middle of the pack, which is a very good sign for the company. The two top finishers were State Street Corp. (STT) and Bank of New York Mellon Corp. (BK) while the biggest surprise may have been J.P. Morgan Chase Co. (JPM), which finished toward the bottom of the group and was projected to have possibly the biggest losses of all the big banks just over $77 billion.
Citigroup is much healthier today than it was a year ago and I believe with the plans in place, and if forecasts are correct, the company should do quite well in the next few years. This is especially true if Citi Holdings is able to break even by 2015 because it will free up much needed capital for shareholders. Citigroup is a good company and deserves an investor's time to see if it would make a good investment.