Banking is really quite simple.
My first job was with the First National Bank of Boston for the grand salary of $24,000 a year. Upon joining, I went through a six-month executive training boot camp program that was really a crash course on corporate banking basics.
I was drilled by crusty veterans on how to read a balance sheet, crunch cash flows, and evaluate loan collateral, and the overriding goal was to determine the creditworthiness of the borrower and have a wide margin for error. The message was clear: get the money back… or else.
I’ll bet the big banks don’t have these training programs anymore. Corporate lending is a much smaller piece of their “financial super-market model,” which has reached levels of baffling complexity. The MBA guys put together a strategy that looked good on paper but became a disaster of complexity during execution.
This management nightmare has also led to landmines exploding on a regular basis for big bank CEOs grappling with keeping tabs on hundreds of initiatives.
One example is JPMorgan Chase’s $13 billion settlement with the Department of Justice and the most recent financial fraud uncovered in Citbank’s Banamex banking subsidiary in Mexico.
These blunders have hit shareholders right between the eyes. They have also fueled the movement by shareholder activists to slim down or break up banks.
This pressure is picking up steam, producing better financial results and improved credit quality.
And you won’t guess who has just jumped on this bandwagon to break up big banks — none other than the 79-year-old former dealmaker that orchestrated the building of super financial Citigroup, Sandy Weill.
A Mid-Life Crisis
Weill has seemingly had a change of heart across the board, moving to sunny California, cashing out of his spacious Manhattan penthouse for a cool $88 million, and putting his 200-foot yacht on the market for $60 million.
Looks like a very delayed mid-life crisis to me.
I’ve always been drawn to Citigroup (C) as the best value amongst the big banks. On August 9, 2012, I recommended it at $28.86. At that time, it was trading at 42% of tangible book value and just 6 times forward earnings.
The share price is now just over $57.
What about the future? Is it still a buy?
This movement for slimmer, more focused and transparent banks is a good one for investors. The unwinding of the financial super-market model is very likely to show that the value of the parts is bigger than current stock price.
Citigroup’s stock is still trading at about a 20% discount to its tangible break-up value. For comparison purposes, the stock traded in 2006 at 260% of book value. Wells Fargo currently trades at a 67% premium to book value.
The value of Citi’s international network alone, with 4,600 branches in 40 countries, seems quite high to me. Revenue and profits are growing in Latin America and Asia. Above all, Citigroup continues to cut expenses, interest revenue now represents a healthy 64% of the bank’s overall revenue, and the bank is successfully clearing bad loans from its book.
Good Value
Citigroup expects to achieve around $2.2 billion in annual savings from current cost-cutting initiatives it has already put in place. The company is continuing to offload distressed assets from its Citi Holdings unit to boost earnings and focus more on core operations.
Citi also posted a nice first quarter, with net earnings of about $4 billion on revenue of $20 billion — not bad for a big bank. And the 7% loan growth is encouraging.
Consumer loans increased 10% over the last three years to $296 billion, and corporate loans grew 50% since the first quarter. In addition, Citicorp’s consumer deposits increased 6% over the last three years, whereas corporate deposits grew even faster at 26% to $600 billion.
For long-term investors, Citigroup still offers good value as a core holding. If it were to pull back sharply with the overall market, I would be an aggressive buyer.
Until next time,
Carl Delfeld for Wealth Daily
