Citigroup Moving Toward Strong Buy For Investors

| About: Citigroup Inc. (C)
This article is now exclusive for PRO subscribers.


Citigroup settles RMBS during 2Q that shadows financial report.

Strong Book Value and lagging stock price sets stage for opportunity in 2015.

Citigroup has redeemed or retired $17.7 in debt securities.

Citigroup used $1.1 Deferred Tax Assets.

Citigroup Inc. (C) stock price has remained in the high 40's to low 50's since about April 2013. Over the last year each quarterly report has been profitable, but the market pressure has just not let the stock price appreciate. The second quarter, 2014 was profitable, but had a one-time charge off that hurt the numbers, but is paid and will not be carried forward.

Citigroup's second quarter's financial report was released on July 14, 2014 posted a net income of $181 million, which was down from last year's $4.2 billion, but this year's second quarter took a write off of $3.8 billion to settle the RMBS and CDO-related claims. Based on this inclusion, the income was still slightly down. The company made a profit of $0.03 per share after the settlement for the RMBS and CDO-related claims. Excluding this settlements, the earnings would have been $1.24, just shy of second quarter, 2013's report of $1.25. This is key to looking forward.

The current book value is $66.76 reported on the company's website which is trading at a discount of .73. For a quality blue chip stock like Citi, this is unusually low, and Citi is waiting for a push to climb over the $50. per share mark and not look back. Through several recent events I believe Citigroup may make a move to breakout in the near future.

A more important measure is the net interest margin which increased to 2.87%. The net margin is key because Citigroup has redeemed or retired nearly $12.3 billion of debt securities in 2013, and $5.4 billion in the first half of 2014. With nearly $17.7 billion less on the balance sheet, and the company reported a higher net interest margin this demonstrates the more efficient and profitable operations by the company.

Citigroup grew its deposits by 3% and its loans by 8%. This is a positive cash flow sign and business operations. Deposits and loans are the heart of capital investments for all banks and this was solid growth for the quarter.

Citi Holdings continues to reduce it assets, however, the value of holding went up second quarter the company is still selling off their assets. Citi Holdings assets are valued at $111 billion, a 15% decline from 2013. Citi Holdings now represents only 6% of Citigroup's assets. Citi Holdings' loss was $3.5 billion for the quarter, up compared to last year of $582 million. Citigroup continues to reduce credit losses as second quarter, 2014 was $5.4 billion compared to $8.2 for the prior year. Citigroup's long slow process of reducing the assets has proven to be a more productive and profitable approach than the fire sale many wanted to see several years ago. As the losses here continue to shrink, the bottom line will continue to grow.

Citigroup was able to utilize nearly $1.1 billion in Deferred Tax Assets this quarter. Translating that to a return for investors, there are about 3.03 billion shares and the reduction of paying $1.1 billion in taxes will go straight to the bottom line. This results in more cash available for reducing debt, a buyback of stocks, or to hold for future ventures.

Citigroup estimated a 10.6% Basel III Leverage Ratio at the end of second quarter. This is up from 10.0% The Federal Reserve Board has not released the standards for banks your 2015, but Citigroup (and all banks) track these figures closely. We expect the Federal Reserve Board to modify or adjust the standards a little, but increasing the cash holding requirement is unlikely. This means Citigroup may have extra cash next year to increase the dividend, buy more debt or decrease the number of shares outstanding. I see a need to do all three to reward investors and improve the long term health of the company. A buy back of shares will also allow for the stock price to appreciate better over time.

Citigroup is the largest U.S. bank operating around the world with a decline in revenues and net income, however, all reported profits for the quarter and year to date. Citigroup maintained business operations as the drops were mainly due to repositioning investments, regulatory costs and international markets. Although we would like to see growth, this quarter was about maintaining market shares and adjusting to international regulations.

The one negative that continues with Citigroup is the inability to raise their dividend this year. Although the Bank of Mexico issue hit the media just prior to the Federal Reserve's approval of each bank's capital plan, the Federal Reserve allowed Citigroup to repurchase outstanding securities, the Feds refused to allow the increase to the dividend. This is one reason the book value continues to climb and the investors have held the stock price near $50 per share. I believe the company will raise the dividend in 2015, and that will reward investors for their long wait.

Going Forward

We expect Citigroup to have productive third and fourth quarters for the rest of 2014. The earnings for each quarter should report near the $1.25 per share (minus any additional settlements). Book value will continue to grow and investors will see the north side of $50 per share. First quarter of 2015, when the Federal Reserve Board approves the Capital Plans for Citigroup, we anticipate a health dividend, a continuance of buying back of debt securities and with a look to the future, the company will also consider buying back common shares. These events are likely to push Citigroup common stock near the $60 range in the next 9-12 months.

Disclosure: The author is long C. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.