Deep value met­rics of Citibank

The Pak Banker - - COMPANIES/BOSS -

Cit­i­group is ar­guably the most con­tro­ver­sial money cen­ter bank on Wall Street. Amer­ica's third largest bank al­most failed in 2008 due to hor­rific $50 bil­lion losses in toxic credit de­riv­a­tives and only sur­vived be­cause of Un­cle Sam's TARP bailout. Cit­i­group also al­most failed in the early 1990s af­ter its bal­ance sheet was gut­ted by losses on prop­erty/lever­aged buy­out loans in 1991 and was res­cued by its white knight share­holder Prince Waleed bin Talal, Chair­man of King­dom Hold­ings. In the late 1970s, Cit­i­group led the ill fated US sover- eign lend­ing binge in Latin Amer­ica since its then CEO Wal­ter Wris­ton naively be­lieved that "coun­tries do not go bank­rupt". It is a pity that Wris­ton was ig­no­rant about the sov­er­eign de­fault of Plan­ta­genet Eng­land dur­ing the Wars of Roses, a de­fault that con­trib­uted to the col­lapse of Florence's Banco Medici em­pire in the Re­nais­sance.

Yet the Cit­i­group of 2016 is a far smaller, more di­ver­si­fied, less lever­aged bank, bet­ter cap­i­talised bank than the bloated in­sti­tu­tion that for­mer CEO Charles Prince ru­ined be­cause he wanted to "keep danc­ing" as the mu­sic played on in the nether­world of US sub­prime mort­gage exc­reta. While J.P. Mor­gan and Bank of Amer­ica have big­ger bal­ance sheet than Cit­i­group, Citi is the most global US mega­bank with a foot­print in 160 coun­tries.

Cit­i­group shares have tanked from their 52 week high at 61 to only 41 now as Wall Street repriced credit risk in Asia, Latin Amer­ica and high yield en­ergy loans. The soft­ness in US man­u­fac­tur­ing data awak­ened fears about "re­ces­sion risk" and the fall in US Trea­sury bond yields since last sum­mer com­pressed net in­ter­est rate mar­gins for US banks. How­ever, 2008 is not re­motely 2016. Cit­i­group has $150 bil- lion equity Tier One cap­i­tal and the Citi Hold­ings loan book has been re­duced to only $100 bil­lion, down from $500 bil­lion when Vikram Pan­dit first suc­ceeded Chuck Prince as CEO in 2009.

Cit­i­group is trad­ing at an un­jus­ti­fied dis­count to its net tan­gi­ble book value of $60 a share. The 242,000 Fe­bru­ary pay­rolls data and a 4.9 per cent un­em­ploy­ment rate also con­vinces me that a June FOMC rate is now a high prob­a­bil­ity event, as im­plied by the Eu­rodol­lar fu­tures mar­ket in Chicago. This is bullish for Cit­i­group, as is the fall in emerg­ing mar­ket and oil and gas loan credit risk spreads in the past month. In fact, since I ex­pect at least seven rate hikes in 2016-17, I ex­pect Cit­i­group's net in­ter­est rate mar­gins to rise, pos­si­bly to as high as 280 ba­sis points by 2018. Cit­i­group could well earn a re­turn of share­holder equity near 12 per cent, so its cur­rent Cin­derella val­u­a­tion of 0.68 times tan­gi­ble book value a com­pelling en­try point to me.

The old Wall Street adage ar­gues the big money is made when things go from Go­daw­ful to just plain aw­ful. This is ex­actly what will hap­pen to Citi's Third World debt/en­ergy port­fo­lio in 2016-17. CEO Michael Cor­bat has ex­ited un­der­per­form­ing busi­nesses around the world, boosted cap­i­tal, di­ver­si­fied the bank's global fund­ing base and re­duced the banks sys­temic risk, though it is vul­ner­a­ble to the reg­u­la­tory strait jacket of Dodd Frank, the Vol­cker Rule and Basel Three. Yet if there was ever a "too big to fail" mega­bank in world fi­nance, Cit­i­group's vast con­sumer, cor­po­rate and in­vest­ment bank­ing em­pire across 160 coun­tries is it.

Cit­i­group's key com­pet­i­tive ad­van­tage is its $900 bil­lion low cost retail de­posits and economies of scale in cash man­age­ment, se­cu­ri­ties un­der­writ­ing/place­ment, global cus­tody, cor­po­rate bank­ing and is­suer ser­vices.

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