Facing the reality of such a health challenge at the age of 32 was unimaginable for her
Citigroup only survived because it was recapitalised and bailed out by successive liquidity and capital lifelines by Uncle Sam. The US Treasury was forced to own $45 billion in Citi preferred sharesvia the Troubled Asset Relief Programme.
Owning Citi sharesis definitely not for widows and orphans, let alone any investor without any abdominal fortitude. Citi traded as high as 37 in March and then plunged to 25 in early June as the storm clouds darkened over Greece and Spain while economic data in China and the US deteriorated. Moreover, Citi failed the Federal Reserve stress test, meaning it is unrealistic to expect the regulators to approve a dividend hike or share buyback. Meanwhile, the recent rise in the dollar/plunge in crude oil and commodities, let alone a flat US Treasury bond yield curve, is not exactly bullish for global growth or emerging markets, the focus of Vikram Pandit’s strategic repositioning. Citi’s beta relative to the S&P 500 index is 2.58 on my Bloomberg screen! This is a hyper-volatile, hyper-risky NYSE puppy.
I prefer to sell long term put options in Citi to generate immediate, lucrative premium. This strategy worked beautifully last September when Citi sharesfell to 21 and works even now as the sharestraded at 25 on June 1. What next for Citi? My strategic view on Citi encompasses myriad prisms. One, value is never a timing/action trigger but Citi is extremely undervalued at 0.5 times tangible book value. There are multiple reasons for its Cinderella valuation but this makes me calibrate downside risk at 18-20 even if Greece blows up this summer, as it probably will...
Two, Citi missed its revenue and EPS estimates in its last report only due to debt value adjustments. This means that it is not unrealistic to expect Citi to deliver $3.90 or even $4 in 2012 earnings (2011 EPS was 3.66). So the sharesare trading just below seven times earnings. This is nowhere near the nosebleed valuation a la Facebook!
Three, loan growth is solid at 12 per cent and ironically, Citi even benefits from a “flight to quality” trade among some depositors given the Armageddon in Asian banking. After all, Uncle Sam proved with hard cash that Citi is too big to fail.
Four, Citi could well slash $3 billion in expenses in 2012. In any case, the shrinkage of Citi Holdings means a $2 drag on EPS that will fall over time. A hedge fund manger in London I respect immensely told me he expects Citi EPS to be $5 in 2014. I agree.
Five, Citi demonstrated positive operating leverage in all its three core businesses (GCB, Banking and Securities, Transaction services). Moreover, 70 per cent of its earnings are now from less volatile, annuity-like sources. Pandit’s strategy is on the money. As earnings volatility falls, valuations metrics rise overtime.
Six, Citi has still not scaled up in China (43 branches) but is a dominant retail bank in Mexico and Chile, my two favourite emerging markets. In fact, the legendary Señor Medina Mora of Banamex runs the entire Global Consumer Bank, the growth engine of the New Citi. The exodus of European banks from US and Asian corporate banking is another windfall in loan pricing. Seven, Tier One Basle Three capital could well rise from seven per cent now to 10 per cent as Citi EPS accelerates and Pandit exits Akbank, the Morgan Stanley Smith Barney venture, even Guangdong Development Bank. In any case, the shrinkage in Citi Holdings means a dramatic reduction in risk weighted assets. My buy sell zones for Citi in 2012? Long at 20 and short at 35, ceteris paribus.
Facing the reality of such a health challenge at the age of 32 was unimaginable for her
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