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Citigroup Enjoys “Too Big to Fail” Advantage

July 31, 2014 | About:

In this article, let's take a look at Citigroup Inc. (NYSE:C), a $151.89 billion market cap company, which is a diversified financial services company that provides a wide range of financial services to consumers and corporate customers in more than 100 countries and territories.

"Too Big to Fail"

On several occasions the bank took severe losses. We can enumerate the following: the emerging-markets loans in the 1980s, commercial real estate in the early 1990s and the subprime-related securities in the 2000s. Citigroup has made effort´s to recapitalized and refocused under new management. Beyond the progress that Citi could have reached, the bank still embodies the "too big to fail" concept.

International Expansion

With a large portion of revenue coming from Latin America and Asia, Citigroup is focused to the rise of Asia, Latin America, and other emerging markets. It´s global presence differentiates the bank from nearly all of its competitors.

Comprehensive Capital Analysis and Review (CCAR)

In March 2013, Citigroup´s Comprehensive Capital Analysis and Review (CCAR) capital plan was approved by the Federal Reserve. This is an annual exercise to ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress. With respect to the capital, the plan included a $1.2 billion share repurchase program through the first quarter of 2014, but left the quarterly common stock dividend at $0.01 per share.

In March 2014, The Federal Reserve objected the CCAR capital plan. The capital actions requested by the bank included a $6.4 billion common stock repurchase program through the first quarter of 2015 and an increase of the quarterly common stock dividend to $0.05. The bank is allowed to continue with its repurchase program of $1.2 billion common stock and a common stock dividend of $0.01 per share per quarter. This happened after the bank disclosed large losses in its Mexican subsidiary.

Revenues, Margins and Profitability

Looking at profitability, revenues declined by 6.82% and a steep decline in earnings per share in the most recent quarter compared to the same quarter a year ago ($0.03vs $1.33).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



ROE (%)





Bank of America Corporation



JPMorgan Chase & Co


Industry Median


The company has a current ROE of 6.69% which is higher than the one exhibit by Bank of America (NYSE:BAC). For investors looking for a greater ratio, JPMorgan Chase & Co (NYSE:JPM) could be an option.

It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.


Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 11.7x, trading at a discount compared to an average of 15.4x for the industry. To use another metric, price-to-sales ratio of 1.99x is below the industry average of 3.1x. These ratios indicate that the stock is relatively overvalued.

As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $16.466, about a 10.5% compound annual growth rate (CAGR).


Final Comment

As outlined in the article, the bank is poised to grow on emerging economies over the coming decade, strengthening its global presence, while returning good levels of capital to shareholders.

Valuation is another key reason to considering Citi as an investment. So in this opportunity, I would recommend fundamental investors to consider this stock for their long-term portfolios.

Hedge fund gurus like Steven Romick (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Manning & Napier Advisors added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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