07.24.2009
updated spring 2010 (bottom page
03.17.2012 repaired broken link
Citibank – Value Stock or Over Priced Stock?
original article written by Net Advisor™ An updated commentary has been added at the bottom of this article in spring 2010.
I have been officially bearish on Citi since 2007. Please see my article under Net Advisor profile where is says, “Companies currently in financial trouble in my opinion in this order;” #4 Citigroup (C).
So where are we now? Is Citigroup a value stock or could it still be over priced?
Keep in mind that just because a stock price is “low” does not mean is a good value. In fact, it could be a Value Trap.
Citibank (C) is not unusually cheap, in fact by all fundamentals; it still may be way overvalued.
Citi is currently losing $4.71 a share on a stock recently trading at $2.73 (as of the close on 07-24-2009).
Citibank is substantially owned by the U.S. government in what amounts to as a forced take over (Source: Reuters – PDF) The government did not take over Citi because they thought it would be a good investment. They effectively took over the company because they (at least I) thought that it was technically insolvent and a full Citibank collapse (bankruptcy) in 2008 or 2009 would have made the 2008 Lehman bankruptcy look like a joy ride at Disneyland.
The U.S. Government has some $45 Billion in TARP funds tied up in Citibank, plus another $335 Billion in loan guarantees and backstops. (Bailout details.)
“The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) will cover 90% of the losses on its $335-billion portfolio after Citigroup absorbs the first $29 billion in losses.”
— Source:
Citi has been forced to sell one of its profitable and iconic asset, the Smith Barney brokerage to
Morgan Stanley. (Source: Reuters.UK)
Note: Travelers Insurance was spun off in 2002, so that asset is no longer part of the parent corporation – Citibank-CitiGroup.
Did Citibank realize they had problems months before the bailout and needed to raise cash?
04-16-2008
Citibank sells customer accounts to Wells Fargo:
“Wells (Fargo) (NYSE: WFC) will acquire the consumer and business relationships representing $500 million in deposits and $60 million in loans.” (Source: San Francisco Business Times)
05-14-2008
Citibank sells 47 (NY bank) branches. (Source: Reuters)
05-16-2008
Citibank asset sales to Irish developers. “Citigroup’s chief executive Vikram Pandit has said he plans to sell over $400bn of assets during the next three years in light of the credit crisis.” (Source: Independent.ie, Ireland)
Post Government-Citibank Bailout:
12-08-2008
“Citi sells German arm for $6.7 Billion to French mutual.” (Source: Reuters)
Losses mounting at Citibank largely due to more risky sub-prime mortgages
Citi reported an $18 Billion write-down (loss) on its sub-prime mortgages in January 2009 – That is a lot of houses. This was the biggest loss in the company’s 196 year history. (Source: Bloomberg)
Citi has been liquidating other assets since to raise desperately needed cash:
06-19-2009
“Citibank sells $1.25 Billion credit card securities.” (Source: Reuters)
06-25-2009
Citi clearly has credit issues so bad; they had to get the FDIC to guarantee new debt issue. Citigroup sold $5.0 billion of FDIC-guaranteed debt in a four part debt sale. The notes are guaranteed by the FDIC. (Source: Reuters)
07-01-2009
Citi has been continuing to sell overseas assets. “Citigroup is dismantling its Japanese operations.” (Source: Bloomberg)
Now how much would you pay for Citibank? But wait, there still more…
07-16-2009
Citi to Outsource U.S. Lockbox Business to First Data:
“Services that will be provided by First Data include lockbox, image capture, posting and reporting of receivables for corporate billers. As part of the agreement, First Data will extend offers of employment to all existing Citi lockbox staff.”
— Source: Banktech.com
To me this suggests a continued winding down of Citibank’s assets. It is not just a selling of a division’s assets, it is also a deal to take Citibank’s employees and move them to a more solvent bank.
It looks like Citibank is continuing to selling off assets. The bank is DOWNSIZING (not by choice), but because it has to.
What some investors may overlook is that Citibank is not the same bank it was 10 year ago, or even 2 years ago. Some investors seem to hold that GM, AIG, FNM, FRE are the same companies as they once were and time will eventually heal them and they will be big again. Can anyone out there try and give some credence to support this hypothesis?
What is even more amazing is that usually newer investors might think that Citi and other government controlled entities are possible takeover candidates? The reason why I would argue against this is because it would have already been done. No one on the planet wanted to take over Citibank because of its (latest report) $1.79 Trillion in liabilities. (Source: Hoovers.com/ Dunn & Bradstreet)
Sure, Citi has substantial assets too. But we all can take an educated assumption and know that those assets are not worth what they once were – not in this economy. We can further deduct that those liabilities are real, and have become a slight problem during the recession.
So what is Citibank (C) common stock worth?
If a bank can’t get a loan from anyone but the U.S. Government your stock is worthless. In March of 2009, Citi temporarily broke under $1.00 a share in intraday trading. The stock has moved off those lows since the date of this article.
Until the bank has been able to fully liquidate assets and shrink its size and pay off and or control its debt, the stock is more than likely to be dead money for the unforeseeable future.
For those who want to gamble on the stock and buy and hold it, I think it is a long shot proposition. I still think that the end game of this stock is the same as GM. Where eventually the company to be sold in a 363 Sale and liquidate the remaining “bad assets” that no one wants, or liquidate assets that are effectively worthless. Those assets that are held in a “bad company” – currently called “Citi Holdings” may eventually come under a Chapter 11. The new company “Citicorp” has already been created to hold all the good assets. (2009-07-06 story link #PRN20090706 gone) .
“Under pressure to revive the fallen giant, Chief Executive Vikram Pandit in January (2009) split the company in two: Citicorp, the company’s global commercial and investment banking business; and Citi Holdings, an assortment of unwanted units and assets to be sold off.”
— Source: Reuters
If I just hold Citi stock long enough won’t it be high again?
Citi’s stock could not possibly return to previous high levels because the assets are being liquidated from the company. Thus, Citi cannot take future earnings from assets it no longer owns. The value of the stock if any, would be determined by what assets remain after paying off the government, and of course how much money can the bank earn off those remaining assets.
And if this wasn’t enough, and assuming they can bring Citibank to life as a much smaller bank, Citi will have to compete with the banks that do turn around such as JP Morgan Chase (JPM). Chase is more likely to run circles around Citi, and all the other traditional banks and be a fierce competitor. Citi will have to also deal with the negative press, and fear from depositors who may have reservation of another failure despite limited FDIC depository guarantees extended to December 31, 2013.
I would rather own institutions that are growth leaders, not facing massive damage and continued downsizing.
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Disclaimer:
This is not a buy, sell, or hold recommendation of any of the companies listed.
Disclosure:
As of post date, have no positions in any of the securities mentioned except a put option in AIG.
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Disclosure: Based on recent momentum and huge call buying volume, have been trading equity and call positions. Please keep in mind that all posts are written with views as of date posted based on data available.
As in my general disclaimer, please keep in mind that “Market and economic conditions can change; therefore, my opinions may change at any time without notice.”
Spring 2010 edit:
Update. Exact update month/day not available. What occurred was that I updated this 2009 post, then forgot to note the current date of this update below. This was sometime in early or spring 2010 it appeared to me that Citibank has done a much better job at improving its balance sheet compared to say AIG. The bank seems to be moving more of a pure-play bank, meaning Citi is becoming more of a pure bank again and not a multi-conglomerate bank holding insurance, brokerage, etc., as it had grown to before its March 2009 crash. As a result, now holding long positions with hedges and various other option strategies effecting long term bullish strategies on Citi. This is a 5+ year commitment.
The government will need to rid all of its shares before the stock is likely to make major moves. However even after that point, keep in mind that Citi does not have the earnings power nor the assets it once had, so forget the stock going to $50 something if not ever in our lifetime. Maybe $7.50 or so in the next few years might be doable if earnings keep up, and the government keeps out. If this happens, that would be a 66% return from a $3.50 stock. The economy will also need to show improvement along with banks earnings and better risk management. No guarantees that any of this may occur.
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image (c) Citibank
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