Citibank: From Outhouse to Penthouse
Updating Citibank after Q2 Earnings: A low valuation play with beaten down expectations and upside potential.
Citibank's been the dark horse winner this year, and it's not even close. They've outrun every other big bank, racking up a 20% plus return year-to-date.
But to understand why this is so impressive you have to rewind to September 2023. Citi was in the toilet, trading in the high 30s. Everyone thought it was dead money. It was mocked, beaten, and left for dead in the rubble pile. And that's when my radar went off.
Here's what I saw:
The numbers were an absolute trainwreck. Earnings?? Pathetic. Efficiency? A joke.
They brought in Jane Fraser in 2021. First woman to run a big bank like that. Now, when you're sitting on a steaming pile that big, you either start shoveling or you're out. I figured she'd have to make some serious moves, or else be canned looking for another job.
Citibank was a global clusterf*ck. Operations, infrastructure, business lines - you name it, it was a mess. Be everything to everyone and do little of it well. Investment bank? Sure. Consumer bank? Sure. Bank shady geographies? Sure, we’ll do that too. But here's the thing: sometimes a mess means opportunity if you've got the gall to clean it up.
The Street hated it. I mean, they wouldn't touch it with a ten-foot pole. And that, my friends, is often when you want to be buying.
I'm not in the business of falling in love with stocks. I'm in the business of making money. And sometimes, that means zigging when everyone else is zagging.
Citibank wasn't a sure thing. It was a calculated bet. But in this game, that's all you've got. You do your homework, you trust your gut, and you pull the trigger.
Remember, the big money isn't in the buying and selling. It's in the seeing something few other people do, building a position, and waiting for the thesis to play out. That’s precisely what happened with Citibank for me.
My sentiment check was here in the fall of 2023, and these were just a few replies from people I respect very much in the bank space:
And these were the nicer comments.
When I saw how everyone and their mother hated Citibank, it hit me like a ton of bricks. My thesis wasn't just smoke and mirrors - it was solid. And here's the kicker: in a market where everyone's expecting dog turds, even a small improvement looks like gold.
So, I pulled the trigger. Building a position around $40. Didn't stop there either. Kept adding as it climbed - mid-40s, low 50s. Winners average winners I’m told.
Then Citibank drops this "Project Bora Bora" bombshell. Cost-cutting initiative. Suddenly, all these Wall Street geniuses start waking up. Wait a minute, they’re going to cut costs? That’s bullish. Mike Mayo catches wind of it in between deadlift sets and does a much better job than I ever could of connecting the dots; not only was this turnaround possible, it would also be very profitable.
From there? It's been a rocket ship. 51% rally. Smoking the QQQ, the SPY, and KRE. Not too shabby for a stock everyone left for dead.
Remember this: The market's usually wrong. When everyone's running for the exits, that's when you need to start looking for the entrance. That's how you make the big money, at least in the bank space (so long as you don’t buy the next SIVB).
Buying Citibank Today?
Let's talk about buying Citibank today. And pay attention, because this is where the rubber meets the road.
Citibank's trading at 74% of tangible book value. That's cheaper than any other big bank out there. It's like finding a Ferrari (okay maybe a Mercedes) priced like a Honda. On forward earnings? 10.9x. Not exactly bargain basement, but not highway robbery either.
You’ve got banks like EWBC, WAL, VLY, and WBS trading cheaper. But relatively speaking they're up to their eyeballs in commercial real estate and credit risk. Any bad headline (even if it’s not true) is going to send any of these names down 5% to 10%.
Here's the kicker: Citibank's rocketed up 50% and it's still the cheapest of the bunch. That should tell you something. It tells you what a dumpster fire they were before this turnaround. But it should also tell you how they still have upside left. Afterall, who would you rather buy? Someone like JPM priced for perfection at 200% plus of TBV or someone in the midst of a turnaround, trading cheaply, and with upside left?
The latter is exactly the kind of situation I look for. When a stock can run up 50% and still be undervalued, that's when my ears perk up. That's when you know there's still meat on the bone.
Take a look at these names below, which of these has the lowest risk and the highest potential future upside?
Now, let's zoom out and look at the big picture of Money Center banks.
These banks? They're not exactly on sale anymore. Hell, you could argue they're getting pricey. JPM's got this chart showing P/TBV (ex OCI) for all Money Centers since 2010 below. It's like looking at a mountain climber who's making their way to the peak.
Let's not kid ourselves - these stocks have had one hell of a run.
When stocks start looking fairly valued, that's when my alarm bells start ringing. It's like being at a poker table where everyone knows how to play. The easy money's already been made because buying right is half the battle.
On a sector level, if you're jumping in now, you better have a damn good reason. Because from where I'm sitting, the risk-reward ratio isn’t what it used to be on the whole.
And think about the times when banks traded even higher than this? 2016-2020 was when the world was enjoying a Trump Bump due to lower taxes and the prospects of easier capital markets (maybe like today?). The other time banks traded more expensively the Fed was doing trillions of monetary stimulus, the PPP program dropped earnings out of the sky, and the US Government was borrowing like a drunken sailor.
So even though we could go higher, I’d still be avoiding people with outsized credit risk or high valuations. They have less torque if we go up from here.
There’s A Bull Case for Citibank from Here:
EPS Growth: We're talking above-average growth for the rest of this year and into 2025. How? They're finally getting their sh*t together on expenses and squeezing out some revenue growth. It’s not rocket science, but it works.
Services Business: This is their golden goose. It's a mess, sure, but it's a valuable mess. Can't be replicated easily, which means it's a cash cow if they play it right. Plus, in theory, given the complexity it also has the most potential “AI benefit” in a clean-up (a stretch I know).
Buybacks: The stress tests didn't kill 'em, and with Basel III possibly easing up, we could see some serious cash coming back to shareholders in time. Don't underestimate how much that can move the needle.
Low Expectations: they’ll always have these until they pump out 10% plus ROTCEs and trade north of TBV.
Bad Memories: Wall Street's got a long memory for Citi's f*ckups. That's keeping a lid on what people will pay for their earnings. But here's the thing - when sentiment shifts, it can shift hard.
EPS Growth? Really?
Let’s talk numbers. Mike Mayo - yeah, that Mike Mayo - is more bullish than anyone on Citi. His team's projecting $5.75 EPS for 2024, ramping up to $7.75 in 2025. That's 30% growth, folks. In this market, that's like finding an AI unicorn.
And here's the kicker - these numbers aren't pie in the sky. NII growth is conservative, they're not banking on NCOs dropping through the floor, revenue growth is modest, and they're not assuming they'll cut expenses to the bone. It's achievable, and that's what makes it interesting to me.
The average S&P 500 company's looking at 14% EPS growth next year. Citibank? They're eyeing 30%. If - and it's a big if - they pull it off, it could be a game-changer. But remember, the market's priced for mediocrity. Any surprise to the upside could send this stock rocketing.
The Crown Jewel Services Business
Citi's got its tentacles everywhere. Been that way since the 1900s when they started throwing money at places like Russia and Cuba. Risky? Sure. But now that global network is extremely valuable (at least in theory).
Think about this, Jane recently mentioned that Citi's pushing $5 trillion in payments. Every. Damn. Day. That's not chump change. Now, this global mess is a double-edged sword. Headaches? You bet. But it's also their golden goose.
Let's break it down:
$4.68 billion in revenue this quarter
$1.47 billion pure profit
23.8% return on tangible common equity
Here's the kicker: 31% of that is non-interest revenue, growing at 11% quarter-over-quarter. That's the good stuff.
Some folks say this business would be worth more on its own. They're right, but good luck making that happen. Even at a conservative 12x multiple, we're talking about a $60 billion business.
Bottom line: This global mess is a pain, but it's printing money. And in this game, that's what counts.
Markets:
Yeah, they pulled in $5 billion revenue and $1.44 billion net income. Sounds impressive, right? But drill down and you'll see a 10.7% ROTCE. They had a big beat in equities which was nice to see.
Banking:
Not exactly setting the world on fire here. $1.6 billion revenue, $406 million net income. Sounds decent? Think again. 7.5% ROTCE.
Investment banking could improve further with easier financial conditions & a Republican (more M&A/Cap Markets) friendly political climate.
Wealth:
They brought in Andy Sieg from Merrill. Big shot. But the backwards looking numbers? Not so hot.
$1.8 billion revenue. Expenses down 6% to $1.54 billion. That's good, but not good enough. Here's the kicker: 6.4% ROTCE. That's pathetic for a Money Center bank. It's like bringing a water pistol to a shootout.
Now, there's room to improve. A lot of room. I believe Andy Sieg is the guy for the job (he’s already being mentioned on calls as having found expense saves) and I believe that this is another low expectation business line that has nowhere to go but up.
Personal Banking:
It's a disaster. 1.9% ROTCE? That's not just underperforming, it's lighting money on fire. The team is saying credit costs are at their peak (and everyone is skeptical) but I do know that with inflation coming down and rates coming down that things should be easing for borrowers. That would be longer term bullish for this segment of the business that is coming from the lowest expectations of any of Citibank’s business lines.
When Will the Buybacks Kick In?
Don't hold your breath, because it isn’t happening tomorrow.
But here's the kicker: it's not as far off as it used to be. Why? Two reasons:
First, Citi aced the Fed's stress tests. Not just passed - crushed it. Their SCB buffer? Down. CET1 requirement? Down.
Here's the meat: Their CET1 is sitting pretty at 13.5%. That's 140 basis points above the 12.1% minimum. In English? They've got a cushion. A big one.
What does this mean? They've got ammo. They're locked and loaded. But they're not pulling the trigger. And maybe they’re not allowed to take the safety off just yet because of the bank examiners, but that day is hopefully not too far away.
Positive development number two was the recent set of quotes from Jerome Powell when discussing the Basel III endgame. In a testimony on Capitol Hill Powell said he expects “broad and material changes” to the endgame proposals and that the Fed, OCC, and FDIC are “very close” to agreeing on changes. While this won’t assure changes, it should at least move the goal posts to a friendlier capital return (buyback) environment for bigger banks. Add that to an already strong capital position and Citibank could potentially fast forward per share metrics with a chunky buyback.
Until then it’ll continue to be quarter to quarter as Mason pointed out on the last call.
Regulatory Overhang & Recent OCC Fines:
Those OCC fines? Yeah, they sting. But here's the deal - they're a kick in the pants Citi needed. Citi's global operation is a beast. It's complex, it's massive, and it's a goldmine. But it needs some fine-tuning, especially on the data side.
Now, they're making progress. Is it as fast as the OCC wants? No. But they're moving in the right direction. In my opinion, this isn't a fail - it's a work in progress.
Jane and Mason? They're not just blowing smoke. They're on it.
Here's the potential upside: Once Citi gets this data management nailed down, they're gonna be a force to reckon with. That global services network? It'll be firing on all cylinders like it always has, but without the regulatory scrutiny.
Remember, in this game, it's not about being perfect. It's about constantly improving. And that's exactly what Citi's doing. I know this is hard to hear, but I do believe Citi is actually improving, not just standing still.
So yeah, keep an eye on it. But don't lose sleep over it. Citi's got the resources and the will to get this sorted. Just read what Jane & Mason had to say on their last earnings call:
What Is Citibank Worth?
Mayo's calling for $7.75 a share in earnings by 2025.
Jane's playing the long game. She's eyeing 11-12% ROTCE. Not tomorrow, but it's on the horizon for her and Mason.
Now, here's the kicker: Book value's sitting at $87.53 a share and I'm seeing a clear path to $75-$80 a share.
Short term, we're talking about closing in on book value which would be 20% to 30% higher from here. And long term? Who knows. But this thing is still cheap even though it’s had a big run up.
Bottom line: There's meat on this bone. But you gotta be patient. Rome wasn't built in a day, and neither is a banking turnaround but something’s different about this Citibank. Maybe it’s because Jane is fighting for her job, but something feels different this time around.
Letting Go of the Past Citibank
And speaking to the past of Citibank, when you mention Citibank, this is what veteran investors see (and maybe feel).
The back story that burned investors is this:
In 1998 Sandy Weill, ambition personified, slams Citicorp and Travelers together. The deal was technically illegal at the time of announcement, but the lobby was strong and the deal got done.
Jamie Dimon the operator and deal man extraordinaire helped execute the merger. But Wall Street's a snake pit. When Weill saw Dimon’s ambition, he was shown the door faster than you can blink. Kicked to the curb. Unluckily for everyone, this would lead Jamie on a revenge tour that would see him become the GOAT at JPMorgan Chase over time. Sandy: if they’re not already, JPMorgan investors should be sending you a thank you card every year.
Down the line enters Chuck Prince, a lawyer playing banker. He's driving Citi blindfolded, spouting nonsense like, "As long as the music is playing, you've got to get up and dance." The music? The housing bubble. The dance? Financial implosion.
2008 hits. Citi's taking on water faster than the Titanic. Government bailout is the only life raft. Without TARP, they’d be gone. Soros nails it: "The music had stopped already when he (Chuck) said that."
For 15 years, Citi's stock is on life support. The balance sheet? A toxic waste dump. Pandit gives way to Corbat, and no one can get Citibank trending up.
In 2021 enters Jane Fraser. First woman to lead a major U.S. bank. Her mission? Turn it around. Can she do it? Wall Street's watching, holding its breath with skepticism in their heart toward Citibank.
As for me, I still like the stock.
The best is ahead,
Victaurs