Underestimating Citigroup

Of all the banks embroiled in the Troubled Asset Relief Program, Citigroup (C) has to be the one that’s taken the brunt of the bad-mouthing. Even as investors have bid up shares in beleaguered rivals such as Bank of America (BAC) and Wells Fargo (WFC), no one wants to admit that Citi might just go on to live another decade.

While shares in most major financial services companies have soared lately, Citigroup is still stuck in the doldrums, hanging around the $3 level.

For sure, there’s been little PR effort at Citi. Having taken $45 billion of government bailout funds, the bank is now being criticized for having skirted Treasury Secretary Timothy Geithner’s guidelines on pay at banks, due this week.

Earlier in the year, Citi paid London bankers Rachel Lord and Stefanos Bitzakidis over £3 million in guaranteed bonuses to move from Morgan Stanley (MS). That has left taxpayers and government officials enraged, while Citi says that the sums were necessary to attract top talent.

“In this economy, I would imagine they would be able to recruit talent without having to pay huge bonuses,” Douglas Wigdor, a New York attorney who is representing five women suing Citi over their layoffs late last year, told Forbes.com.

Three months behind schedule, Citi announced Monday that it would begin a $58 billion stock swap in order to replenish the bank with the $36 billion in losses it has assumed in the previous six months. That will give the U.S. Treasury Department a 34 percent stake in the bank.

There was another reason for Citi shareholders to be glum Monday, too: it marked the first day of trading with the bank being excluded from the Dow Jones Industrial Average. Last week, News Corp. (NWS) announced that it was replacing Citi with Travelers Insurance, a bizarre move seemingly aimed as a shot at the bank rather than a compliment to the insurer.

Citi’s prognosis is a far cry from rivals JP Morgan (JPM), Morgan Stanley and Goldman Sachs (GS), which are all being given the go-ahead by Treasury today to pay back TARP funds.

Tough at the top … but juicy in the middle

Typically, Citi’s problems don’t begin and end with its balance sheet. For many, the financial chaos of the bank is merely a reflection of the careless management practices of chief executive Vikram Pandit. Indeed, one of the reasons for the delay in the stock swap was Federal Deposit Insurance Corporation chairman Sheila Bair’s probing of Pandit’s suitability to lead Citi from here on.

FDIC officials seem keen to depose Pandit, and many now say his fate will turn out similar to that of Bank of America’s Ken Lewis, who was ousted as chairman of the bank earlier in the year. But a change in management is the last thing Citi needs as it hangs by a thread of stability amid the turbulence of loans, debts, and criticisms no end.

Fortunately for Citi, it’s not all that bad. The bank turned a profit in the first quarter (albeit dubiously), and the big hires with guaranteed bonus checks should pay off in terms of real performance.

There’s already some sign that they are. Arguably, Citi’s new hires are beginning to have a notable impact on turning around the bank’s traditionally shy approach to doing business.

In fact, while Citi’s hiring policy might seem inappropriate in the current climate, the bank has acted much more competitively than rivals such as Morgan Stanley, which is doling out large basic salaries in order to compensate for lost bonuses. While Citi will be forced ultimately to incorporate similar uncompetitive schemes into its franchise, it has staved the inevitable off for as long as possible.

In other words, while Vikram Pandit will probably lose his job, Citi will retain lots of incentivized, aggressive bankers in the middle of the organization who will keep the bank’s wheels turning faster than many think.

In a recently cocksure environment, being underestimated may turn out to be Citigroup’s biggest advantage of all.

Disclosure: No positions

Comments

[ebschor:]

"While shares in most major financial services companies have soared lately, Citigroup is still stuck in the doldrums, hanging around the $3 level."

That's because it's the only bank with a majority ownership by a completely unpredictable government when it comes to private sector meddling. Uncertainty is the certain way to keep investors out.

Jun 10 07:06 AM

[mdpath:]

If, as you say, C has so much potential, why aren't you long?

Jun 10 12:22 PM

[nobby73:]

"Arguably, Citi’s new hires are beginning to have a notable impact on turning around the bank’s traditionally shy approach to doing business."

Say what? They did not have a shy approach to doing business. They did everything with scant regards for the risks, assuming the portfolio approach would work out, which is why they are in the mess they are today. Would anyone advocate they take more risk in the future?

Jun 10 04:06 PM

[discov:]

C is a black box, you would need a lot more specific research to back up a long position in such a speculative long (especially if you are going long the common)

I also did some TA here tinyurl.com/8nxn9h the technicals aren't convincing either.

Jun 10 04:30 PM

[Alex Trias:]

I own some Citibank stock, only because when it was trading at around $1 a share, I just couldn't say no. That said, the real value in this company (assuming it is not entirely insolvent), would be break up value. Citi is a hodge podge of businesses, where one hand has no idea what the next is doing. Citi's balance sheet is too complex for any person to understand, and given the opacity of it's assets, liabilities and, frankly, real income, few want to own this company. The only reason to own Citi at these prices are (1) you bought it when it was a penny stock and you are in a very high income tax bracket; or (2) your placing a bet that in time, the company will be broken apart, spun off, sold, and otherwise dismantled, which would help remove clouds of uncertainty over the company's business model, assets, income, liabilities, and risk, and which removal would, in turn, harvest value for shareholders. Nevertheless, in my view, the company as currently configured is a poor investment to say the least, and a "bust up" arbitrage bet is not something appropriate for any investor other than those with a very high risk tolerance.

Jun 10 04:38 PM

[Mr. Ed, Jr.:]

"The bank turned a profit in the first quarter (albeit dubiously)"

"Dubiously" doesn't even begin to describe Citi's "profit".

I don't think Citi will exist a year from now. The Obama administration needs to sacrifice a big bank to reassure everyone that they still believe in capitalism (Such as it is these days).

Jun 10 06:24 PM

[Moon Kil Woong:]

Indeed no one is underestimating Citi's ability to siphon money from the federal government (the benefit of failing). If there is one reason to buy it is to dream of your tax money actually doing something that will inevitably benefit you. Dream implies that even then, most likely you are likely to be dissapointed.

Jun 10 11:04 PM

[Harry Tuttle:]

"While shares in most major financial services companies have soared lately, Citigroup is still stuck in the doldrums, hanging around the $3 level."

They are up 200% from the low, which is better than most. What makes you think $1 was the wrong price? Citi's balance sheet is as bad as ever. If they ever clean that up, they can work on the $1 trillion off-balance sheet.

Jun 11 10:20 AM