This article will discuss the merits of investing in Citigroup (C) versus its peers in the banking community. I am taking an objective approach to determine if Citi is a turnaround opportunity. Many retiree and dividend investors want to know is there is hope in the next few years. I recommend retiree investors, with their speculative funds, look at the investment options, in the "too big to fail" banks. We have to roll with the punches and make our profits where available. Retirees are likely to benefit with enhanced dividends and capital appreciation in my conclusion.
Brief History: Citigroup was founded two hundred years ago, in 1812, as the City Bank of New York. Since then, Citi has funded some of the biggest innovations in modern history - the first transatlantic cable in 1866, the Panama Canal in 1904, the Marshall Plan for the reconstruction of Europe in 1948 after World War II, the ATM in 1977 and the space shuttle program in 1995.
Today, Citi is a leading global bank with approximately 200 million customer accounts in over 160 countries. Citi's business comprises of Consumer and Institutional operations. After the banking debacle in 2009, Citi has emerged as one of the world's better capitalized large banks and appears to be on a recovery track but could still be impacted by unforeseen large scale global events.
Consumer: Citi's Global Consumer Banking (GCB) business is one of the largest retail banking operations in the world and serves over 100 million clients in 40 countries.
GCB has five primary business units:
- Retail Banking (over 4,600 Citibank branches with deposits of over $300 billion)
- Citi Branded Cards (Citi is one of the world's largest issuers of credit cards)
- Citi Mortgage (primarily in the U.S. with expansion plans in high-growth markets)
- Citi Commercial Bank (serving 100,000 small and medium companies in 32 countries)
- Citi Retail Services (consumer and commercial credit cards, services and retail solutions with partners such as Home Depot (HD), Macy's (M) and ExxonMobil (XOM).
GCB has operations in Asia, EMEA (Europe, Middle East, Africa), Latin America and North America. U.S. operations still account for half of revenues, profits, deposits and loans but revenue growth is being driven by BRIC countries (Brazil, Russia, India, China), Argentina, Colombia, Korea, Malaysia, Mexico, Panama, Poland and the like.
Through its institutional business, Citibank provides:
- Corporate and Investment Banking (full range of services for businesses, governments and financial institutions in over 160 countries)
- Citi Markets (active market participant in the daily sales, trading, distribution and research of equity, debt, currency, derivatives, commodities and other securities)
- Citi Private Bank (managing $250 billion for high-net worth clients)
- Citi Capital Advisors (that offers alternative investment strategies)
- Transaction Services (mediates over $3 trillion in daily capital flows across 140 countries)
Citigroup is structured as two units - Citicorp (which includes Citi's core businesses and accounts for 93% of total revenue) and Citi Holdings (which includes Citi's non-core, non-growth businesses and is being phased out).
Financials: For its first quarter ended March 31, 2012 (1Q 2012), Citi reported total revenues of $19.4 billion of which Citicorp contributed 93% (see table below). Revenues were up 13% sequentially but down 1.6% year-over-year.
Revenue was impacted by adjustments of $1.3 billion tied to special items included credit valuation adjustments (CVA) on derivatives and debt valuation adjustments (DVA) on debt held.
Expenses and the cost of credit held more or less flat over the year, and net income was down 2.3% year over year to $2.9 billion. Net income per share dipped 4% year over year from $0.99 in 1Q 2011 to $0.95 in 1Q 2012 but excluding special items was up, to $1.11 per share. 1Q 2012 results also included a net gain of $477 million on minority investments.
Citi shares had a tangible book value of $50.90 per share at quarter end. As the table below shows, Citi continued to wind down its non-core Citi Holdings business which saw a 47% decline in revenue year over year.
Citicorp's GCB unit contributed 56% to revenue, Securities and Banking brought in 29% and Transaction Services contributed 15%. By region, North America contributed 40%, Asia 22%, Latin America 20% and EMEA 18%.
Revenue grew 4.8% year over year at its GCB unit, dropped 12.4% for Securities and Banking and was up 7.1% for Transaction Services.
By region, Latin America and Asia led year over year growth to the tune of about 10%. North America saw a significant 8.8% drop in revenue and EMEA saw revenue decline 2.8%. Strategically, Citi realizes that North America and traditional European economies such as France and Germany are mature, and is focusing its growth on Asia, Latin America, new European countries and other growth nations.
Citi ended the quarter with $26.6 billion in cash, down 4.4% year over year, a 9.1% drop in total investments made by Citi, a modest 3.1% increase in total loans made by Citi and total assets of $1.9 billion, more or less flat y/y. Total U.S. deposits saw strong growth, up 15.2% to $350.8 billion, while international deposits were more or less flat.
Over the past year, Citi also reduced its debt load. Short term borrowings were down 29.3% and long-term borrowings were down 17.4% to $311.1 billion. Total shareholders' equity was up 6% to $183.7 billion.
Dividends: Over the past six quarters, Citi has paid a nominal quarterly dividend of $0.01, largely because of the negative financial impact of the banking crisis in 2008 and 2009. Before the crisis, Citi regularly paid a healthy quarterly dividend. For example, in 2007, Citi's quarterly dividend was $5.40 which dropped to $3.20 in 2008, then to $1.60 for the third quarter of 2008, to zero in 2010 and then to $0.01 for 4Q 2009, where it has since stayed.
Citi shares were reverse-split 1 for 10 on May 9, 2011 after they were decimated during the 2008-2009 banking crisis. Shares traded at $31.67 as of May 7. Citi had a market capitalization of $92.7 billion, roughly half its shareholders' equity. Shares are also at a discount to Citi's tangible book value of $50.90 per share. Shares have an 8.8x price to earnings multiple.
Citi's peer group comparison:
Action: I recommend the Citi warrants, which have an expiration date - prior to the reverse spin - of January 2019 and a strike price of $10.61. The leverage is in your favor.
Wells Fargo & Company (WFC)
I recommend retirees invest in the Wells Fargo warrant which expires October 28th, 2018. The strike price is $34.01. There is likely an arbitrage opportunity in futures years.
Bank of America Corporation (BAC)
Bank of America is the compilation of merging with NationsBank on September 30, 2008; Countrywide on July 2008; and Merrill Lynch on January 2009. The company
is a "too big to fail" bank. I would recommend the January 16, 2019 warrants with a strike price of $13.30. This provides ample opportunity for the bank to improve its business model and shareholders to profit.
Retirees should not ignore the fact that their investments have an edge. The banks are too big to fail. The implications of such a policy can be debated by others, but we have the facts on our side. Let's make money.
I recommend retirees invest - with a sliver of their portfolio allocation - in Citi, Wells Fargo, and Bank of America via the warrants instead of the shares. We will have time on our side. The U.S. government has decided these entities are too big to fail, so we have a strong edge on our side.