Citigroup (C)

Global Reach : The firm maintains operations in every major geography, and emphasizes a well diversified income statement spanning across its business lines. There are very few universal financial institutions that can provide this advantage. Citigroup has pushed into Asia, which now makes up nearly 22% of its net income - Japan, Mexico and Latin America also make up a substantial part of its revenue. As the economic conditions in the US sour, Citi's strength abroad will provide it with stability.

Cost Cutting Works : In April 2007 Citigroup announced its plan to cut 17,000 jobs and move 9,500 jobs to lower level positions, to save it 10.4 billions dollars in spending. Citigroup has also sold off CitiCapital for $4 million, CitiStreet for $222 million, Citigroup's German Retail Banking Operation for $4B, and Citigroup's Interest in Citigroup Global Services Limited for $505 million. In April 2009, Citi prepared to sell its Japanese retail brokerage and investment banking operations for approximately $5.2B.^[1] Citigroup has pushed to sell off and shrink down the size of its business in the hopes of making itself more competitive in the long run. Citi's CEO Vikram Pandit announced that he would take a salary of $1 and no bonus until the firm was returned to solvency. This shows the management's dedication to cutting costs and returning C to a performing bank.^[2] This strategy will help Citigroup survive the economic downturn.

The banking industry, for at least the past 15 years, has been one of the most profitable and stable industries. So even if Citi is down right now, it will come up again. Consider the basics of banking, you give a company some money, they lend it out to people for anywhere between 5% - 20% and pay you roughly 0.5% on your common checking account. Then, every time you want access to your money, you have to pay a fine, and every month for the privilege of lending your money to them, they charge you a monthly fee. It’s a thing of beauty isn’t it? To any business man or investor, it is.

As of March 3rd, Citigroup’s price is $23.11/share. With total assets totaling over $113B, this puts Citigroup’s book value at $21.80 / share. In the past 10 years, Citigroup’s share price has never come this close to it’s book value. Not to mention when you are paid a cool 5.5% in dividends while you wait out the storm. This would be a great time to take a long term approach on this stock.

It will be a long time before we see another clearance sale like this one for an established and respected financial institution

For the last several weeks, we’ve heard a lot of speculation, gossip, insider info, leaks and commentary concerning the Federal Reserve and U.S. Treasury Department’s banking stress test.

So now that both organizations have announced that they can’t deliver the results as promised… that in fact, they won’t be able to release the information until late next week… well, what are we supposed to think?

According to The Wall Street Journal, officials pushed the release date back due to some disputes between the government results and the financials themselves, including Bank of America Corp. (NYSE: BAC) and Citigroup (NYSE: C).

As I mentioned before and you doubtlessly know very well regardless, everybody’s speculating over the reasons. The majority of analysts however, believe the tests will show that at least a few banks need more capital or a higher quality of capital in order to continue lending should the economy take any significant continuation of a downturn during 2009 or 2010.

However, in a round of good news for the banks and shareholders but potential bad news for future American taxpayers, the Obama administration has said that it intends to assist any and all of the nineteen banks that had to undergo the stress test should they need help. In other words, none of them will be allowed to fail.

In addition, the details we do know about the analyses indicates that should they need to, they’ll be allowed to raise capital through a number of standard and newly opened methods. Those include through private investors, borrowing more capital from the government, and converting existing government investments into common stock.

Citigroup Inc. (C) Chief Executive Officer Vikram Pandit said the bank has been operating at a profit through the first two months of the year for the first time since the third quarter of 2007 - the last time it recorded a profit.

But even as the news was hitting Wall Street, a report revealed that regulators are “contingency planning” ways to further stabilize Citigroup if needed. And yet another report said major banks could face “catastrophic” losses on derivatives if the economy worsens.

“I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained by Bloomberg. “In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

Pandit said the first-quarter performance so far is based on historical revenue and expense rates. Citi’s projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.

Citigroup I believe is on the road to recovery, albiet slow recovery, I do not think the Fed's will allow it to fail and certainly will not nationalize it, consequently the sky's the limit.

The FASB agreed to give banks more flexibility in applying mark-to-market accounting to their toxic assets.Action came after Congressional pressure to help banks that have been forced to record billions of dollars in lower values for distressed assets because of frozen markets. Some investors opposed the change, saying it would let big banks conceal the real value of their toxic assets. How is an asset that a bank will not be selling a toxic asset and why should it be marked down today? These assets are expected to remain on banks balance sheets for the foreseeable future.

KEY POINTS:

• FASB allows banks to apply new mark-to-market guidance in the first quarter of 2009.
• FASB says the objective of mark-to-market accounting is to set a price that would be received by a bank in an "orderly" transaction in the current, inactive market. It says an "orderly" transaction for accounting purposes does not include the forced liquidation or a distressed sale of an asset.
• FASB agrees to drop the presumption in mark-to-market accounting that all transactions in an inactive market are distressed unless proven otherwise.
• FASB clarifies when banks are required to take write downs on impaired assets, letting them record smaller losses on their income statements.

This flexibility will help big banks such as Citi recoup billions in losses. Banks can now use "significant judgment" to value assets.

The earnings will be better and better from now on as a result of the FASB return to fake accounting!

Citigroup has shifted towards an aggressive growth strategy by making substantial acquisitions in emerging markets. A particular emphasis has been expressed in Japan and India. In 2007 and 2008, Citigroup acquired branches of Banco de Chile, Nikko Cordial, Bisys, Legg Mason Private Portfolio Group, and Grupo Cuscatlan and other banks and portfolios in the push to diversify and stabalize itself. The vast majority of these acquisitions were centered on Latin America and Asia. Citigroup also had put forth an offer to purchase Wachovia. The purchase would have made it the 3rd largest bank in the US. Although the purchase was not completed due to Wells Fargo, the offer demonstrates Citi's acquisition mindset.

At the current level, Citigroup has a dividend yield upwards of 6%, which is compelling.