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Thoughts On Citigroup

|Includes: Citigroup Inc. (C)

I recently purchased shares of Citigroup (NYSE:C). Often I like to scratch down my thoughts for myself before investing as it forces clearer thinking. I've decided I will start sharing some of these in hopes that other investors might find some thoughts worth researching. These aren't fleshed out in detail, and many of my investments turn out badly, so do your own research and don't rely on mine.

Citigroup investment Thesis

Citigroup is trading at a price to book of 0.64, a price to tangible book of 0.74. It has a P/E of 9.16 and a forward P/E of 8.52. It's Price to Free Cash Flow is 3.76, which represents its cash flow being much higher than earnings. All of these are on the cheap side for their ratios compared even to other banks, which are historically on the cheap side now due to a weird macro environment.

Tangible capital is growing significantly faster than earnings. Earnings grew at $1.10 per share, tangible capital per share grew at $2.25.

Citigroup has a $45 billion deferred tax asset (DTA). As they are profitable they will be converting that to cash, and start to earn a return on that cash. If you exclude the DTA Citigroups ROE jumps from 9.2% reported to 11% actual. It is my expectation that over time as the DTA starts to diminish those ROE numbers will rise from 9.2% towards 11% without any improvement in the underlying business.

Share buybacks start to have a strong amplifying effect when you buy shares at a price to tangible book of 0.74. Every $1 of share repurchase is buying $1.35 of tangible book value. On the last investing call one investor jokingly asked why they aren't selling office furniture to buy shares.

Being the card issuer for Costco will be short term neutral to profitability as there are ramp-up costs, but in a year or two those credit card users will be a huge win. The previous Costco contract basically kept American Express in the credit card business.

Risks:

Citigroup has more exposure to credit cards than other banks, if the US goes into another recession then credit card issuers are likely to be affected disproportionately.

In a world where several major countries have negative interest rates, not long ago believed to be an impossible situation, does anything related to finance even make sense? If negative interest rates persist and do make sense do they depress bank profits?

Disclosure: I am/we are long C.