New Citi strategy?

Citi offered another opportunity to accumulate in the trading book last week at 34 as its 12 per cent fall since Election Day was due to political noise on Asia recession scenarios required by the Federal Reserve capital stress test and the hoofbeats of the hedge fund herds eager to chase the high beta US housing rainbow via Bank of America, the best performing Dow share of 2012. Yet Citi surged three full points last week after CEO Michael Corbat slashed 11,000 jobs and sealed back the Global Consumer Bank in Pakistan, Uruguay, Romania, Turkey and Paraguay. Citigroup has been my favourite US money centre bank because I still believe Wall Street undervalues the sheer earnings power of its global businesses, not least its US consumer loan/mortgage/wealth franchises as US home price and capital markets volume/pipeline rise.

The Goldman Sachs Fin conference in New York was, as I expected, the venue to unveil the strategic template of the post Pandit new Citi. John Gerspach targets 10 per cent ROE, 125-150 basis ROA. This means 2014 EPS could well be as high as 5.60. A post-Fed stress test multiple of 10... well, you do the math. I did it in June and swiftly grasped that Citi offered irresistible 60 - 80 per cent money making potential as I scanned the global banking village. Amazing how luckier you get the deeper you dig into the homework.

Let me stress that all is not hunky dory in the kingdom of Citi. The Libor sanction probe, Dodd Frank, the Volker Rule, Fed CCAP politics in Congress (stress test/capital returns) could all get nasty as would consumer debt time bombs in Brazil, India or the GCC. Yet I still believe Citi is a steal at 36 or 0.65 times tangible book since Wall Street simply undervalues its exposure to US housing via a consumer loan/credit portfolios whose scale dwarfs even Well Fargo, JPMorgan, US Bancorp or PNC.

Citi’s US loan loss reserve releases alone could goose 2012 above current consensus estimates. In any case, capital markets is a wild card for Citi since Salomon Smith Barney’s balance sheet is $900 billion, not much smaller than Goldman Sachs. However, Securities and Banking bottom line will benefit from tighter credit spreads, emerging markets M&A, Asian/Mena debt underwriting, global forex and robust FICC market making even as Corbat slashes low margin cash equities. Trading volumes have been hypervolatile since 2011, another Corbats no-no.

Citigroup has many ingredients I seek in a bank share I intend to buy. Positive operating leverage in the Global Consumer Bank, a rise in net interest rate margins, organic deposit growth, improving credit trends and rise in capital ratios, cost control and efficiency metrics. The real catalyst for 2013 will success in the 2013 Fed stress and thus a dividend payout of at least 0.60 and accelerated share buy back programme. Capital return and proactive global restructuring will be the twin themes that move Citi in 2013, even as the bank achieves Basle Three compliance, even achieves a nine per cent Basle Three Tier One ratio by next year end. These events will have a seismic impact on Citigroup’s valuation metrics.

I was asked why I devote so many columns to Citigroup by a senior UAE banker. Good question. So many of my friends in Citi Dubai from the 1990s lost their entire life savings in Chuck Prince’s CDO/subprime credit Armageddon that I want to keep them updated on Citi’s epic renaissance. Tangible book value in Citigroup is now $52 though I believe the bank will continue to trade at a discount as long as annual Fed stress tests continue. Yet excess capital returns, the US consumer loan book, emerging markets growth and loan loss release windfalls for EPS are the reason I believed the bank was a money maker for investors at 25-26, which is exactly what happened.