By William Patalon III
Executive Editor
Money Morning/The Money Map Report
It’s time to take a close look at Citigroup Inc. (C).
That’s been the mantra of several commentaries here at Money Morning.
But now, Punk, Ziegel & Co. LP analyst Richard X. Bove has made much the same recommendation. As readers know from our news stories and investment research reports, we don’t usually put a lot of stock in what Wall Street has to say. But in the last six months, when it comes to Citigroup specifically and the beleaguered banking sector in general, Bove seems to have consistently made the right calls.
And since his latest opinion is in agreement with ours, we thought it worthy of note. According to Bove’s most recent commentary, Citi shares were selling below expected revenue for 2010, and well below stated book value. The biggest U.S. bank by assets is making some shrewd strategic moves and the latest market scuttlebutt holds that Citi’s capital strength is actually stronger than most investors believe, Bove told Reuters.
If those rumors are true, Citigroup will not take "mammoth" write-offs in the first quarter, meaning that Bove’s earnings estimates also would prove to be too low. Bove also noted that the stock was now selling below expected revenue for 2010 and well below stated book value.
"This is simply ridiculous,” Bove said. “Fear has replaced logic. Buy it.”
[To read Money Morning Investment Director Keith Fitz-Gerald’s investment overview of Citigroup shares, please click here. The report is free of charge].
The Background on Bove
Citi shares closed Friday at $19.78, down $1.29, or 6.12%, each. Citigroup shares are down 64% from their 52-week trading high of $55.55. But they are barely above their 12-month low of $19.54.
When it comes to Citigroup specifically and the banking sector in general, Bove is one of a very small group of Wall Street analysts whose opinion is well worth consideration. As Money Morning reported, back in early October, Bove took the unusual step of cutting his rating on Citigroup to "Sell" from "Market Perform," and lowered his target price on the stock to $43 from the prior target of $53.
But now Bove has reversed course. And with good reason.
Chief Executive Officer Vikram Pandit is scrutinizing operations throughout the bank in an attempt to cut costs and boost earnings.
Pandit isn’t just restructuring Citigroup’s businesses – he’s also taking steps to make sure there’s no repeat of the credit missteps that landed the bank in its current financial jackpot. Pandit is tweaking Citi’s risk-management operation and has taken the dramatic step of putting Chief Financial Officer Gary Crittenden in charge of efforts to simplify the company's organization and enhance efficiency.
Last Thursday, the bank said it would cut its home loan exposure by $45 billion, or 20%, a move that would reduce risk reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business. Citigroup, which suffered a $9.83 billion fourth-quarter loss tied largely to mortgages, said it plans to fold its Citi Home Equity and Citi Residential Lending businesses into its existing CitiMortgage Inc unit.
Pandit is putting his new operating program in place and more announcements are likely as he reshapes and strengthens Citigroup's businesses, Bove said.
"What Mr. Pandit is not doing is breaking up Citigroup into a number of large separate businesses,” Bove said. “He is committed to developing working relationships or cross selling among the company's existing operations.”
Once again, Bove called it correctly.
Citigroup’s Strategies
In a meeting with analysts late last week, Pandit confirmed that Citigroup that the bank plans to shed “hundreds of billions of dollars” in assets to support a turnaround that could take several years to engineer, the Dow Jones News Service reported.
The company has raised about $30 billion to shore up its capital from investors that include Abu Dhabi and Singapore.
The bank also is reviewing its leadership team and plans to make changes before its next meeting with investors, which is set for May 9. At that time, Citigroup expects to disclose more details of the company's restructuring plan, including which businesses will be kept and which would be sold or wound down.
“We expect hundreds of billions in assets to be shed,” said Susan Roth Katzke, a Credit Suisse Group (CS) analyst who was among the dozen or more sell-side analysts who met with Pandit last Thursday night.
Pandit wouldn’t estimate the proceeds that Citi would reap from selling the non-essential assets. But he did speak “generically about a sizable benefit he expects,” UBS AG (UBS) analyst Glenn Schorr told Dow Jones.
In a research note to clients, Schorr wrote that “[Pandit] didn’t say it, but we got the impression that management thinks this, plus future earnings, adds up to enough capital relief to offset any future write-downs.”
Citigroup also has begun reorganizing its Japanese operations and plans to sell off its stake in Japanese mutual fund company Nikko Asset Management Co. Ltd. The firm also sold eight consumer banking branches in West Texas and closed several underperforming branches across the country.
Credit Suisse’s Katze also expects Pandit to realize that there is a need for a “massive amount of streamlining,” as well as an upgrade of technology and systems infrastructure across the bank.
And while major sections of Citigroup are apparently being put under the microscope, she said that analysts “did not walk away with the impression that management intended to exit any major business lines in whole. [Brokerage] Smith Barney will not be for sale anytime soon, if management has its say.”
Moving On
The challenge with a turnaround is that while the company is working to make itself over, it still has to operate its ongoing businesses profitably.
Citi is doing just that.
The banking giant recently said it plans to hire more people in its Asian commodities business over the next two years as global raw materials prices have soared to record levels because of supply shortages and demand out of China.
The bank expects to roll out more investment products and risk-management services in such areas as coal, freight, agriculture and emissions, said Ananth Doraswamy, the bank's regional head of commodities.
The bank is "investing in areas of growth," Doraswamy told The Financial Express.
Citigroup is boosting its presence there at the perfect time. Right now, money managers in Asia invest less than 2% of their assets in commodities. That compares with as much as 10% in the United States and Europe. Commodities outperformed stocks and bonds in the past year.
The banking company currently has 17 people in energy and commodities in Asia, including seven in oil and metals trading. Oil, gold and wheat have jumped to their highest-ever levels as raw materials gained for the seventh-straight year.
News and Related Story Notes:
- Reuters: Punk Ziegel Says Buy Citi on Rumor of Further Capital Strength.
- The Financial Express: Citigroup to Hire More Commodities Staff in Asia.
- Money Morning Investment Analysis: Avoid the ‘Resurgent’ Homebuilding Sector and Go Global for Profits.
- Money Morning Investment Research Report: Citigroup: Why This Turnaround Play Has Legs - Big Ones.
- Money Morning Investment Research Report: Why Some of the World’s Savviest Investors are Buying – Gasp! – Citigroup.
- Money Morning Special Investment Report: Global Investing: Has Wall Street Rigged the Game?
- Money Morning Special Investment Report: International Investing: Why U.S. Investors are “Boxed Out” of Big Global Profits.
- Smart Money/Dow Jones News Service: Citigroup Chief Signals Major Asset Sales.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.