Many great investors such as Leon Cooperman seem to believe Mr. Corbat's efforts at Citigroup (C, Financial) are pointing towards the right direction. Under Corbat's leadership, the U.S.'s most international bank is cutting costs aggressively and introducing efficiency targets for almost all the bank's areas. As a matter of fact, some top-level executive bonuses will require the bank to meet a 2015 return on tangible equity (ROTE) of 10%, up 2.2% from the currently below average 7.8%. Industry leaders such as JP Morgan (JPM, Financial) and Wells Fargo (WFC, Financial) produce ROTE just above the 10% mark.
I believe Cooperman is right. If you want to own a large U.S. bank, Citi looks like a great alternative. Let's take a look at three points that make Citi a great alternative.
Focus on Efficiency
According to Citi's CEO, “We’re going to stay focused on expenses and making sure we’re getting investments in the right places.” Indeed, the bank is not only cutting jobs in almost every region but its also closing or selling its consumer operations in countries that are unable to reach the bank's minimum profitability level – Pakistan or Uruguay, just to name a few. That said, the bank will continue to serve corporations in all countries where it currently operates – which is more than 100. After all, one of Citi's most profitable (with returns on equity in excess of 30%) and valuable businesses is its transaction services operation, an international network that allows Citi's corporate clients to manage their funds in different countries.
Increasing Capital Returns Should Be Expected
Thanks to the unwinding of Citi Holdings, Citigroup is now excessively capitalized. That said, even when the excess is now clearly visible to all investors, it is only in the past year that Citi's ratios did exceed Basel 3 (B3) minimums. Citi's B3 ratio was 7.9% in the second quarter last year and did not cross the 10% mark until the second quarter this year. According to the bank's CFO, Citi intends to ask for capital returns in excess of earnings, but this would not happen in 2014. Regulators are looking for consistent performance before giving their approval to boost capital returns. I think we will wait until 2015 to see aggressive buybacks and higher dividends. Nevertheless, now might the time to start accumulating the shares.
Citi Looks Cheap
At the current level, even when the shares are up by almost 29% year to date, I think Citi is still essentially undervalued. The bank is now trading at just 1 times tangible book value. Higher quality U.S. competitors such as JPMorgan and Wells Fargo sell for 1.4 and 1.9 times their tangible book value, respectively. In addition, while Citi is still chewing through the drag from Citi Holdings and litigation, there is a tremendous improvement in credit quality. Net charge offs have come down 13 quarters in a row, and non-performing assets (NPA) for 11 of the last 12. Overall, I think Citi has ameliorated enormously during the past three years and now the bank is ready to become a leaner more profitable organization ready to give cash back to its shareholders.
