Citigroup (C) is one of the great money center banks in the United States. In terms of size, it is the third largest U.S. bank with $1.88 trillion in assets. It ranks just behind JPMorgan Chase (JPM), which has $2.39 trillion in assets and Bank of America (BAC) which has $2.17 trillion in assets. Citigroup has a market cap of $151.8 billion, and its stock price is around $49.
Citigroup, like a number of its closest competitors, absorbed big losses during the financial crisis of 2008 and 2009. During 2008 and 2009, the bank lost more than $29 billion largely, because of losses from subprime mortgages. The bank has done a good job of turning things around, and has shown a profit in every year since. Citigroup was able to return to profitability, and improve its balance sheet, by reducing their subprime loan portfolio, and increasing the requirements for those that were seeking new mortgages. The company also cut risk taking, in its trading businesses, and scaled back investments in markets that were not profitable.
In the second quarter of 2013, Citigroup received big profits from its securities and banking unit where bond revenues rose 18%, stock trading revenues soared 68%, and revenues from underwriting and advisory work moved up by 21%. The bank also benefited from the record low interest rates which boosted its mortgage business. In addition, Citigroup reduced its net credit losses from $3.49 billion to $2.61 billion.
The Future of Citigroup
Citigroup's future looks bright. It appears that their securities and banking unit will continue to grow revenues and profits. The bank will also benefit from an improving balance sheet. Over the last year, it reduced its portfolio of bad assets by $60 billion to $131 billion. In addition, it increased its Tier 1 Common Capital Ratio to 10%. That was quite an achievement because it makes their capital ratio higher than competitors such as JPMorgan Chase 9.3%, Bank of America 9.6% and Wells Fargo Corporation (WFC) 8.6%.
Citigroup will also reap benefits from its global expansion. It does business in more than 160 countries and has approximately 200 million worldwide customers. Perhaps Citigroup's biggest area of growth will be in China. In 2012, Citigroup created a joint venture in China. The venture was with Orient Securities which is a Chinese firm, based in Shanghai. The joint venture was OK'd by the Chinese government. The growing Chinese middle class needs investment opportunities, and this could be part of the answer. Some predict that China will see incredible growth in investing from its citizens in the next 10 years. The joint venture was approved by the Chinese government, and was named City Orient Securities. China could represent 25% of Citigroup's wealth management business.
In recent news, Citigroup announced on June 26th that the Chinese government would allow it to market local mutual funds. Citigroup has the largest presence of any foreign bank in China, and the government's permission to market mutual funds will be a tremendous boost to its wealth management business. In the second quarter, the bank had revenue of $18.18 billion which was up 8% from the second quarter of 2012. If Citigroup's Chinese business grows as well as hoped, it is likely that revenues could grow at an even faster rate.
Since CEO Michael Corbat took over the leadership of Citigroup in October of 2012 the stock is up 42%. This puts Citigroup in the envious position of having one of the best performing stocks among the large money center banks in 2013. Since the beginning of the year Citigroup's stock price is up 19%, Bank of America's stock price is also up 19%, JPMorgan Chase's stock price is up 17%, and Wells Fargo & Company's stock price is up 23%. It is clear that stocks in the banking sector are on the rise. What is interesting is that these stocks are still cheap. For instance Citigroup has a price to earnings ratio of 15.79 and a price to book ratio which is less than book value, at of 0.79.
In the second quarter, Citigroup was able to increase revenues by 8% and earnings per share by 25% on a year over year basis. Also, the bank has done a good job of reducing its bad debt inventory and expanding it business internationally. The bank has a Tier 1 common capital Ratio under Basel III of 10%, which means that it will probably pass the upcoming bank examiner inspection, and raise its dividend in the first quarter of 2014.
Citigroup's stock price is up by 66% over the last 52 weeks, and the stock may be overextended. The company's growth in international markets is slowing due to their slowing economies.
I believe that Citigroup will continue to grow revenue and earnings, and despite the fact that its stock has rallied, it is still cheap. I think that Citigroup will be a profitable acquisition for patient investors.