News broke on July 1, 2013, that Citigroup Inc. (NYSE: C) reached a deal with Fannie Mae (OTCQB:FNMA) over the breach of representation and warranties on 3.7 million residential first mortgage loans between 2000 and 2012. Citigroup has agreed to pay Fannie Mae $968 million, which covers almost all issues.
This does not release Citigroup of liability of its current contractual obligations on the covered loans. It also does not release liability to a group of less than 12,000 loans originated between 2000 and 2012 with certain characteristics such as loans sold with a performance guaranty or under special credit enhancement programs. Citi currently believes it is adequately reserved for the loans not covered by the agreement. Citi has and will continue to work with Fannie Mae on the timely repurchase of any mortgage loans sold to Fannie Mae that do not meet Fannie Mae's requirements.
We anticipate this settlement of near a billion dollars will be taken off the books during 3Q, 2013. This will not limit any profit Citi has made over the second quarter, but will settle over the second half of the year. Citi's stock price high of $53.56 just a month ago has seen it slip to a close on July 1, 2013, of $48.25 and we expect it to maintain sub $50 for the next 60 days while investors digest the effects of this near-billion dollar payout.
Good news from China as Citigroup and HSBC Holdings PLC (HBC) have been approved to market local mutual funds in China. China's markets are controlled, but not structured to serve the masses of Chinese investors like the U.S, European, and Japanese markets. This move by the Chinese government may be an attempt to get many investors into mutual funds that will encourage wealth building through long-term investments. Citigroup has the largest access of any foreign bank inside China and the marketing opportunities will be enormous to Citi's wealth management business. China has been attempting to increase foreign investment this year, but still maintains stringent controls on foreign investments. The Shanghai stock market has instructed companies to return 30% of profits to shareholders in the form of dividends, while some of the barriers to entry for foreign investors have been reduced.
In January 12, Citi created a joint venture with Shanghai-based Orient Securities and was approved by the Chinese government. On August 12, the joint venture was named Citi Orient Securities and became operational. It has a registered capital of $126 million with Citi holding a 33.3% stake in the venture. With the number of outlets Citigroup currently has in the country and the anticipated growth, the amount of investments expected to flow into these funds will be staggering. Chinese investments will be the largest growth market over the next 10 years. China could represent 25% of Citigroup's wealth management within 10 years.
For these reasons we rate Citi group as a long-term buy with a stock price growth driven from business growth. We anticipate an end of year target stock price of $53 and long-term valuation of 10% or more per year.
Citigroup Inc., is the leading global bank, and has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citigroup provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.
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.