We never forget our first real job.
For me it was the First National Bank of Boston, the second oldest in the country founded in 1784. Hired by the Asia-Pacific group, I first went through a six-month executive training program that was really a crash course on corporate banking basics.
Drilled by crusty veterans on how to read a balance sheet, crunch cash flows, and evaluate loan collateral, the overriding goal was to determine the creditworthiness of the borrower and have a wide margin for error. The message was clear – get the money back or else.
I’ll bet the big banks don’t have these training programs anymore. Corporate lending is a much smaller piece of their “financial super-market model” that has reached levels of baffling complexity.
This management nightmare has also led to landmines exploding on a regular basis such as JPMorgan Chase’s ongoing $9 billion trading loss and its just announced $13 billion settlement with the Department of Justice.
These blunders have hit shareholders right between the eyes. They have also fueled the movement to slim down or break up banks. This pressure is picking up steam.
And you won’t guess who has just jumped on this bandwagon to break up big banks – the 79-year-old former dealmaker that orchestrated the building of Citigroup, Sandy Weill. Weill has seemingly had a change of heart across the board, moving to sunny California, cashing out of his spacious Manhattan penthouse for a cool $88 million and putting his 200-foot yacht on the market for $60 million.
I’ve always been inclined to Citigroup (C) as the best value amongst the big banks. On August 9, 2012 I recommended it at $28.86. At that time it was trading at 42% of tangible book value and just 6 times forward earnings. The share price is now just over $51.
What about the future? Is it still a buy?
This movement for slimmer, more focused and transparent banks is a good one for investors. The unwinding of the financial supermarket model is very likely to show that the value of the parts is bigger than current stock price.
Citigroup’s stock is still trading at about 80% its tangible break up (book value) value. For comparison purposes, the stock traded in 2006 at 260% of book value.
The value of Citi’s international network alone with 4,600 branches in 40 countries seems quite high to me. Revenue and profits are growing in Latin America and Asia. Above all, Citigroup continues to cut expenses, interest revenue now represents a healthy 64% of the bank’s overall revenue and the bank is successfully clearing bad loans from its books.
For long-term investors, Citigroup still presents good value as a core holding but the stock doesn’t make the Value Bounce’s hurdle of expected gains in the next six months of 50% or more.
Opportunity awaits,
Carl Delfeld.
