ValueAct Buying Citigroup and Pressing to Buy Back 25% of Its Stock

A review of ValueAct's most recent investment into the banking behemoth Citigroup

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May 13, 2018
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ValueAct Capital Partners LP, previously lead by Jeffrey Ubben as CEO, built a $1.2 billion major position in Citigroup Inc (C, Financial). The bet appears to be primarily driven by Citigroup's position as a global money center bank able to service corporations. ValueAct tends to be a constructive activist focused on helping corporations they engage with. In this case they reportedly sent a letter to the board suggesting to increase the buyback program planned from $40 billion to $50 billion.

For good measure; Citigroup has a $185 billion market cap. Meaning the ValueAct increase would result in Citi buying back over 1/4 th of its stock, provided that didn't impact the market...

According to the WSJ ValueAct wrote:

“We believe that in this era of banks, the winners and losers will be decided by strategic focus, customer centric innovation, and capital allocation, as opposed to product breadth, appetite for risk and investment in trading talent that defined competition in the pre-crisis era,”

They seem to like how the company is involved in underwriting corporate debt and FX but not as much in investment banking where a lot of money flows to the talent.

Analyzing a few key metrics for the big four U.S. banks also paint the picture that Citigroup isn't as valued by investors. J.P. Morgan and its celebrity CEO Jamie Dimon are most highly regarded with a 70% premium to Citigroup's book value:

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Citi even trails Bank of America by about 30% even though its ROE and ROA ratios have not been entirely dissimilar:

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The key to attractiveness of bank stocks is really in the ROA and ROE:

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Returns on Assets tend to expand as interest rates trade higher. Return on Equity can increase if regulation is dialed back. Both of these things are currently happening. As per Morningstar:

federal banking regulations are set to ease under the Trump administration. That could give the nation's biggest banks more room to make shareholder-friendly moves.

That, in turn, could remove a key reason the industry's leaders have mostly been left alone in the wave of corporate activism that has forced breakups, capital returns, and other major shifts at other companies across the U.S.

Ciitgroup at around ~1x book value, representing a discount of about 30% to rival Bank of America, looks like an attractive proposition. Especially agains the backdrop of regulation getting rolled back and improving interest rates. Not the worst idea by ValueAct Capital which has in recent year favored special situations and core activist holdings, while returning capital to investors, considering the market highly valued.