A Financial Services Holding Company Where the Net Interest Margin is Among The Widest Around

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Company Name: Citigroup Inc

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Stock Name/Ticker: Citigroup Inc /C

Coverage Region: US

INVESTMENT THESIS

Citigroup Inc. (Citi) is a financial services holding company, whose businesses provide consumers, corporations, governments and institutions with financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services, and wealth management. The Company operates through two primary business segments: Citicorp and Citi Holdings. Citicorp consists of the operating businesses: Global Consumer Banking, which consists of consumer banking in North America, EMEA, Latin America and Asia, and Institutional Clients Group, which includes Banking and Markets and securities services. Citi Holdings contains businesses and portfolios of assets that Citi has determined are not central to its core Citicorp businesses. Citi's consumer operations, as well as the consumer finance business in Korea and certain businesses in ICG form part of Citi Holdings. [1]

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Figure 1: 2015 Citigroup revenue breakdowns

Citigroup’s revenue stream predominantly comes from the North America market which accounts for 48% by region and also largely derived from the Global Consumer banking market which generates half of their total revenue.

Since the Financial Crisis in 2008 where the US government had to bail them out, Citi price had been battered from a high of USD 500s to current pricing of USD 42, the worst seems to be over for Citi and it may be on the route to recovery based on a few indications as highlight under the “Huat” factor.

ECONOMIC MOAT

We view Citi to have cost advantage as its main moat in its core banking operations being one of the 4 largest banks in the US. Switching costs and intangible assets are present in their investment banking segment.

P.I.E.C ANALYSIS

Base on the financial numbers, taking the year 2008 as a base, the EPS have been on an uptrend but erratic. Operating Income has been positive since 2010. ROA have improved from -1.4% to about 0.96, but still short of the benchmark of 1.2 which signifies a good quality bank.

R.I.S.K ANALYSIS

The banking industry can’t run away from regulatory risk. Citigroup's presence in emerging markets, being the company's biggest advantage, is also the source of the most risk. Rapid credit growth can be highly profitable on the way up, but almost never ends well. Citigroup is banking on the long-run rise of the global consumer, but there could be challenges on the way, leading to volatile financial results. A secondary source of risk is the company's investment bank, a business that we have been a perennial source of disappointment for investors.

VALUATION AND PORTFOLIO SIZING

Using the VIC calculator, valuating Citi as an asset play, we derived a P/B value of around 0.6 which gives a margin of safety of 40%. Based on a Business Confidence Index of 7.5, the maximum position sizing for this stock is around 3% of the total portfolio.

MANAGEMENT AND OWNERSHIP

New CEO Michael Corbat, in contrast to Vikram Pandit, who brought experience of investment banking and hedge funds to the CEO role, has served in a variety of basic banking roles around the world during his time at Citigroup. He seems to be focused on scaling back the bank's operations, announcing cost cuts and branch closures in his first major move as CEO. However, we think it will take time to change the company's culture, and missteps along the way are inevitable.

Citi have 58.31% of shares being held under institutional ownership and about 2% of insider ownership only.

CORPORATE ACTIONS

The latest round of Insider occurs during Jan and Feb 2016 by both the CEO and CFO at $41.01 and $37.62 respectively. The last round of quarterly dividend was paid out in Jan 2016 amounting to USD 0.05 cents. This gives an annualised dividend yield of around 0.46%. Dividend payout ratio is only at 3%, thus giving it a lot of headroom to rise as performance improves.

"HUAT" FACTORS

  1. Cost cutting measures including reducing headcount by 28,000, assets by over $130 Billion and legal entitles by over 1/3, shrinking branches by 30% [2]
  2. ROA have been returned to about 0.96 compared to a low of -1.4% previously in 2008 [3]
  3. Efficiency Ratio at 54% in line with top banks like WFC, BAC and JPM [3]
  4. Net Interest Margin is among the widest at 3.48 compare to WFC, BAC and JPM. [3]

"SIAN" FACTORS

  1. Citi have been employing cost cutting measures for a few years now to return to profitability, not sure if this strategy would continue to work.
  2. Citi have pulled out of 11 lower-performing consumer markets in 2014. This move is deemed as a short-sighted strategy which may not help in the long run.
  3. Emerging-market exposure may pull Citigroup performance down just as the U.S. begins to recover.

[Case study written on 20 Mar 2016 by Paul, Singapore]

 

References:

[1] Information adapted from www.jitta.com:

https://www.jitta.com/stock/c

[2] Information extracted from Citigroup Annual Report 2015:

https://www.citigroup.com/citi/investor/quarterly/2016/annual-report/

[3] Information extracted from www.bankregdata.com:

http://www.bankregdata.com/allIEmet.asp?met=EFF

 

Figure 1: 2015 Citigroup revenue breakdowns

https://www.citigroup.com/citi/investor/quarterly/2016/annual-report/

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