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Thoughts on Citi


Myth465
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I cant make heads or tails on this one but if you are long today seems like a nice day to be buying warrants, options, or shares.

 

Any thoughts on what normailzed earnings will be. I guess one could add back all the write offs from this year to get a run rate. Then maybe adjust up or down depending on whether you are bullish or bearish (more pain or new profitable loans).

 

What are you guys doing to get comfortable.

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As I typically hate ETF's, I must admit that I am playing the banking sector thru the XLF.

 

JPM, BRK, Wells, BAC, Citi, GS are the top holdings.  I am not smart enough to figure out which is better, but I do think that we need the banking sector in order to have a strong US economy.  The franchise valuations of these companies doesn't make sense to me (too low).

 

If I was to play individual names, I would probably look at Bank of Hawaii or Hudson City, of which I own neither currently.

 

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As much as I try to come up with a "normalized earnings" for citi, I am never able to get much above $0.8 EPS which is based on a very simplistic 1.2% ROA which I think is about average for Citi even after excluding the 2008-2010 period. Given that Citi is shrinking its BS I cannot see how Citi can earn $1 with nearly 30 billion in shares outstanding. Given that it is a near certanity that it would go through a near death experience once again over the next 10 years (having gone through this about once a decade for the last 4 decades and having participated in every significant scandal involving the financial industry of the last 20 years), I am just not able to see the value here.

 

Obviously Bruce is on to something but along with AIG, I have not been able to understand the value he sees in Citi.

 

Vinod

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As much as I try to come up with a "normalized earnings" for citi, I am never able to get much above $0.8 EPS which is based on a very simplistic 1.2% ROA which I think is about average for Citi even after excluding the 2008-2010 period.

 

Vinod

 

1.5% would get you to Bruce's $1 -- Pandit has been saying 1.25% - 1.5% (he said it again today on the conference call).

 

I think the optimism around higher than historical ROA is based on a return to a lower cost funding strategy (leaning more on deposits).  They effectively (pre crisis) used high cost debt to buy high yield assets.  The Citi Holdings split moves them away from that (liquidating non-core assets for reducing debt as it matures).  In doing so the risk of the blowup that you speak of every 10 years is also reduced.  Most of their pain came from that risky strategy.  And they had concentrated US consumer exposure, which they will no longer have -- geographic diversification ought to help.  Anyhow I got into the stock at $3.30 12 months ago, and it's not the same value proposition any longer (that's not all bad news for me though).

 

Interestingly (I only recently realized this), if you had bought the stock at book value 10 years ago (which you couldn't have) you would have actually made a little bit of money even if you are still holding it (counting dividends).  Of course, it was trading at 2x book in 2000 -- but today it isn't.  I'm just saying that even if the next 10 years look just like the last 10, you won't lose any of your capital (but not making much money is quite painful isn't it?).

 

 

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As I understand, Citi experienced a run on the bank first (according to the recent SIGTARP report) especially in the GTS segment, and then counterparties began to refuse intermediate and longer term exposures. So while its true that they've cut down on short-term debt reliance, they haven't addressed the issue of deposit quality.

 

Management has addressed deposit composition in reiterating the intent to go after HNW segments spearheaded by card marketing campaigns, rather than 1st mortgage issuances, which leads me to believe that C is still an asset focused player.

 

I would like to see the Latin American and Asian retail banking revenues catch up to the growth in the card services businesses, to avoid looking like the NA segment circa 2007. It will be difficult to live up to the promise of longer duration liabilities when your expansion plans center around credit cards.

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1.5% would get you to Bruce's $1 -- Pandit has been saying 1.25% - 1.5% (he said it again today on the conference call).

 

I think the optimism around higher than historical ROA is based on a return to a lower cost funding strategy (leaning more on deposits).  They effectively (pre crisis) used high cost debt to buy high yield assets.  The Citi Holdings split moves them away from that (liquidating non-core assets for reducing debt as it matures).  In doing so the risk of the blowup that you speak of every 10 years is also reduced.  Most of their pain came from that risky strategy.  And they had concentrated US consumer exposure, which they will no longer have -- geographic diversification ought to help.  Anyhow I got into the stock at $3.30 12 months ago, and it's not the same value proposition any longer (that's not all bad news for me though).

 

Interestingly (I only recently realized this), if you had bought the stock at book value 10 years ago (which you couldn't have) you would have actually made a little bit of money even if you are still holding it (counting dividends).  Of course, it was trading at 2x book in 2000 -- but today it isn't.  I'm just saying that even if the next 10 years look just like the last 10, you won't lose any of your capital (but not making much money is quite painful isn't it?).

 

 

Good job on Citi!

 

Yes, you do get $1 if you assume a 1.5% ROA on the $1850 billion in current asset base. But, Citi excluding Citi Holdings has only about $1300 billion in assets. The $500 billion odd in assets in Citi holdings I assume are going to be in runoff. So would require more than 2% ROA to generate $1 EPS. To put this in perspective, it require earnings of more than $30 billion a year or 50% more than either WFC or BOA.

 

Also the Book Value has held up because they were able to raise $90 billion in equity sales mostly at greater than book value so BV per share has been helped by this. Also the $300 billion in bad debt that it was able to hand off to Govt has also helped in this regard.

 

Vinod

 

 

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As I understand, Citi experienced a run on the bank first (according to the recent SIGTARP report) especially in the GTS segment, and then counterparties began to refuse intermediate and longer term exposures. So while its true that they've cut down on short-term debt reliance, they haven't addressed the issue of deposit quality.

 

Is this similar to the fire that didn't kill the people at the theater, rather it was the crush of people clamoring for the exit?  Why is it that I haven't yet been crushed while leaving a theater -- is it because I haven't yet been in one that is on fire?

 

 

Yes, you do get $1 if you assume a 1.5% ROA on the $1850 billion in current asset base. But, Citi excluding Citi Holdings has only about $1300 billion in assets. The $500 billion odd in assets in Citi holdings I assume are going to be in runoff. So would require more than 2% ROA to generate $1 EPS. To put this in perspective, it require earnings of more than $30 billion a year or 50% more than either WFC or BOA.

 

 

You're right, it makes no sense.  He is perhaps expecting a lot of loan growth -- that's all one can come up with to defend Bruce.

 

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You're right, it makes no sense.  He is perhaps expecting a lot of loan growth -- that's all one can come up with to defend Bruce.

 

 

Another alternative is that there are lots of off-balance sheet assets that are not being reflected on the books. I did try to size the off-balance sheet items but not really able to find anything that would be much higher for Citi than BOA. But then I have never been able to get my head completely around the off-balance sheet stuff of the big four banks.

 

Vinod

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Surely he means $1 like 5 years out from now, right?  Once Citi starts growing the balance sheet again?  That doesn't sound unreasonable.

 

I think he means $1 in current normalized earning power. See his comments below.

 

CONSUELO MACK: And so, when you look at, you know, a Citigroup, for instance. Let’s just take them one at a time. I mean, it’s value now. Do you think that there’s still a lot of value left?

BRUCE BERKOWITZ: Yes. Citigroup has the ability to earn a dollar a share, which would put it at $10, let’s just say. And you compare it to where it’s trading today, four. Under four.

 

Vinod

 

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