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.
While the U.S. Treasury’ stake selling is restraining Citigroup valuation, the successful execution of recovery strategy and the third consecutive quarter of profitability are indicative that the company is back on capturing its original growth potential. The US government has reduced its original $7 billion stake in C to $3.3 billion. The eventual finish of Citigroup selling could give a boost to the company’s valuation.
1) The major plus for upside earnings is the M2M rule suspension, especially for Citi, without it the bank would incur losses in EPS in the entire FY 2009. However, suspending FAS 157 is a step in the right direction, this is a rule that was not utilized for 70 years, was reinstated in 2007, only to cause a global collapse in 2008.
2) Upward Sloping Treasury Yield Curve : Larry Kudlow pointed out recently that “the upward-sloped yield curve is the real bailout for the banking system.” The yield curve is very favorable and provides easy money for all banks. The majority of profits for all big banks in the first quarter of 2009 was a direct result of the upward sloping yield curve and the increasing interest spread. That spread continues to widen in the second quarter.
3) Private equity secondary market offerings: May 2009 was a record month for secondary offerings and Citi was very active in this market.
4) Overseas markets are in pretty good shape and revenues should be rising alongside. In addition, overseas income will get a nice boost due to currency fluctuations.
5) Huge reduction in operating expenses: Pandit iterated that they have reduced expenses by 25%. In the past several months Citi has cut its expenses by almost $4 billion per quarter. If Citi can keep or reduce the last quarter number of $12 bill. expenses, this will further increase bottom line numbers.
6) Credit card losses seem to have stabilized. Citi was the only big bank that had the same default rate on credit cards as April ( as opposed to BAC for example), delinquencies rates fell for the second month in a row (remember that delinquencies are directly correlated with the real credit losses, not the default rates). In addition, Citi has limited exposure to commercial real estate (only 2.5% out of the estimated stress test losses).
7) Nikko Cordial and Smith Barney are still generating revenue for Citigroup in this quarter. They will continue to show good numbers given the fact that the market was bullish in April through mid-May.
8 ) Citi has greatly reduced their risk exposure, this is evident in the 1Q data.
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.
1, US house Market is up and US economic is getting better.
2. More people will borrow money from bank to do investment.
3. Europe Banks is not good because they tax their customers.
4. Globe market of C is getting much better.
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. 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. This strategy will help Citigroup survive the economic downturn.
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.
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.
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.
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.
Market on rebound, and Citi with 200m accounts around the globe will accumulate profits quickly. Plus, gov selling shares, coming out of TARP, and posting a better quarter than expected with the price falling 25% in past 2 months suggests it is ready to pop. Very bullish.
In todays world there is no other financial institution that can facilitate and implement the range of services with which Citi provides its clients. Below are ten highlights to keep in mind when analyzing its equity.
At the end of the second quarter of 2009, the company’s Tier 1 Capital ratio, a key measure of financial strength, was 12.7%, among the highest in the industry.
Citi’s Tier 1 Common increased by approximately $64 billion following its recent exchange offer. Its Tangible Common Equity (TCE) will increase by approximately $60 billion, resulting in approximately $100 billion of TCE and a Tier 1 Common ratio of over 9%.
Structural liquidity at the end of the second quarter of 2009 was 71% compared to 55% at the end of the third quarter of 2007.
Citi has reduced key risk exposures by 37% year over year to approximately $97 billion (e.g. year over year, direct
sub-prime exposure is down 57% and highly leveraged finance commitments are down 65%); anmore than 50% since the end of 2007.
Citi has reduced quarterly expenses by 23% since the fourth quarter of 2007 while continuing to invest in innovation and serving customers well.
Since the beginning of 2007, Citi has worked successfully with approximately 625,000 homeowners to avoid potential foreclosure on combined mortgages totaling more than $67 billion.
Regional Consumer Banking deposits grew in every region versus the prior quarter, with particular strength in North America, where deposits grew 6%. Total deposits were $805 billion, up 6% sequentially and flat with prior year levels.
Citi has sold more than 20 businesses since the end of 2007, redirecting its focus on core businesses.
Since the begginging of 2008, Citi has reduced assets within Citi Holdings by approximately $250 billion.
Last quarter, Institutional Clients Group had net income of $2.8 billion, up 17% from prior year levels on record net income from Transaction Services and strong results in Securities and Banking.
As referred to the rising trend of C, it is soon picking up BAC in short time. C & BAC has similar fundamentals, both of similar +ve net equity, C also has a huge total asset value of US1.7T, also quite close to BAC. Now, BAC already approached US$20 per share, close to 30% from its highest, whilst C has only achieved 8% from US$70 before financial tsunami.
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.