- Citigroup shares fell after plan fails Fed stress to return capital to shareholders.
- Citigroup's strength lies in its unrivaled global footprint.
- Citi's value will ultimately be realized, despite the Fed's setback.
Citigroup's (NYSE:C) shares fell after receiving disappointing news on returning capital to shareholders. We believe C has great value, and with its value easily overlooked and misunderstood.
Citigroup is a unique institution, and in many ways, is the world's bank. Few could even be mentioned in the same breath, with its footprint in countries throughout the globe. C has been in China for over 100 years, and maintains one of the largest banking operations in Latin America at the other end of the earth. At the same time, C has an interest in Banamex. The footprint stretches into locations in Poland and India. C has branches in more than 100 countries. It is the entity that safekeeps assets in the most frontier of markets, with nearly every institution using its network in some fashion. Citi can clip a ticket nearly every time a transaction takes place in these locations, the equivalent of a financial toll road.
The path forward for C is to monetize its footprint, making banking and transactions simpler for institutions seeking global solutions. What other institution can service a transaction from Sao Paulo to Beijing or to Mexico City, Warsaw, Bombay, and Capetown? Influential analyst Mike Mayo recently pointed to the high return on assets for C's transaction services business, exceeding 2%, that exemplifies C's ability to gain commercial value from a global footprint.
Corbat seems to be on the right track, reducing the hobbies of old and winding down C's "bad bank." At the same time, he is right-sizing businesses and markets where Citi lacks a competitive advantage -- see domestic retail banking -- C just doesn't stack up to the likes of Wells Fargo (NYSE:WFC), Chase (NYSE:JPM), and Bank of America (NYSE:BAC) in the space.
The problem for Citi is the Fed seems to want small institutions that don't threaten the financial system. Consensus is building Citi was heavily penalized for its risks in emerging markets. Citi would be remiss to disassemble its global footprint that provides short-term upside from appeasing the Fed. Despite this setback, ultimately, the high returns Citi can drive from its global footprint will drive the shares higher.
The only thing that can prevent it is Citi disassembling these key pieces as means to appease the Fed. We'll know soon enough if Corbat goes off-track and decides to sell much of the international branch footprint, or gut the transaction services businesses, in which case, the downward stock price may be prescient.