A Tale Of Two Citis

Jun.15.12 | About: Citigroup Inc. (C)

Citigroup (NYSE:C) is one of the oldest denizens of the US financial sector: it's been around 200 years. It's seen many bailouts and financial crises during that period. Citigroup was one of the hardest hit by the 2008 crash: adjusted for the reverse split, C stock is more than 95% below the high of 2007.

The news for Citigroup has been somewhat of a mixed bag. Last December, Citigroup ranked 23rd of the 100 largest US banks in a comprehensive analysis of financial health by Forbes. Yet this March, Citigroup underperformed in the Fed's stress test.

Citi's strategy for remedying problems is as follows:

Instead of boosting its capital payouts, the company intends to build its capital level and continue with its efforts to trim its non-core assets.

Read more here.

This sounds like a pretty good strategy, but the key question is execution. Will Citi follow through on their promises?

The Good Citi

Citi definitely has some things going for it. An overview:

  • The stock is cheap compared to book value: tangible book value is reported as $50.90/share, and market value per share is approximately half of that.
  • The stock is cheap on an earnings basis: analyst consensus for 2013 earnings is $4.62, giving Citi stock a forward P/E of between 6 and 7
  • The shares trade just over half their reported March 31 tangible book value of $50.90, and less than six times the consensus 2013 earnings estimate of $4.62
  • Although Citi nearly collapsed post-crisis, it has repaid the $45 billion taxpayer bailout
  • Citigroup has returned to profitability and reinstated a dividend
  • After scrapping plans for boosting shareholder payouts, Citi actually passed the Fed stress test.
  • Citi is set to increase dividends and/or stock buybacks in 2013

The Bad Citi
Citi is still facing problems and, in some cases, a complete lack of confidence. Consider the following:

  • Out of the 19 big banks, Citi was one of only five not allowed to proceed with its capital plan
  • Citi is lagging behind peers like JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) in stock buybacks, which could lead to comparative underperformance
  • Citi was one of only three companies embarrassed by shareholder rejection of the executive compensation package. Such rejections are rare events that signal lack of shareholder confidence in management.
  • Citi has a high level of European exposure, with a high percentage of exposure to some of the "weakest links." From MarketWatch:

In a presentation earlier, Pandit had given details on Citigroup's net current funded exposure to Western Europe as of the end of last year.

To corporations, it was $4.1 billion: $1.4 billion of that was in Spain, $1.3 billion in Greece and $0.8 billion in Italy.

To financial institutions, it was $1.6 billion, with Spain accounting for $1.5 billion of that.

To sovereign governments, it was $0.7 billion, with $0.4 billion of that in Italy.

Conclusion: Citi Improving, but Has Work To Do

(click to enlarge. source: FreeStockCharts.com)

Click to enlarge

Citi definitely has some factors in their favor, but the road to recovery may be slow. Especially with the high level of European exposure -- specifically to Spain, Greece, and Italy -- I'm not convinced that Citigroup can keep up with its peers. Stronger banks like Wells Fargo probably present investors with a more certain financial future at this point.

For those looking for a little more risk (and consequently upside), I've written before about why Bank of America (NYSE:BAC) is my favorite contrarian play in the financial sector.

Disclosure: I am long BAC.