Citigroup: Buffett’s Latest Bank Addition Could Go Much Higher (NYSE:C)

Citi headquarters in London

_ultraforma_

Citigroup (NYSE:C) smashed Q2 earnings as it delivered huge beats on the top and bottom lines. Shares of Citigroup rose 13.23% ($5.84) on Friday, bringing its share price to $49.98. Citigroup has had a tough 2022 as shares are still down by -20.79% even after the strong rally on Friday. Before Berkshire Hathaway’s (BRK.A) (BRK.B) investment in Citigroup was disclosed, I had written an article outlining why it was drastically undervalued compared to its peers. All the big banks have trended into negative territory in 2022, but sometimes there is value underneath the chaos. The market had a strong rally on Friday, July 15th, so it will take some time to see if it’s sustainable, but Citigroup’s earnings clearly proved that this banking institution still has a lot of upside left in the tank.

Citigroup vs big banks

Seeking Alpha

Citigroup smashed Q2 earnings and increased two very important metrics, book value and tangible book value

In the Q2 earnings print, Citigroup produced $2.19 of GAAP EPS which was a $0.52 beat, and $19.64 billion of revenue which was $1.32 billion above the consensus estimates. Citigroup returned $1.3 billion to shareholders through dividends and buybacks, had a dividend payout ratio of 29%, and generated $4.5 billion in net income. Revenue increased YoY by 11% as larger net interest income was driven by higher rates and strong volume across the institutional client group and personal banking and wealth management segment.

Some investors may look at the declining numbers in net income and EPS and worry, but I think the book and tangible book value statistics are more important. Citigroup’s net income decreased -27% YoY due to a higher cost of credit and an 8% increase in expenses, which offset the 11% increase in revenue. Citigroup’s operating expenses of $12.4 billion in Q2 were driven by investments in its transformation, higher business-led investments, and volume-related expenses. Citigroup’s cost of credit was $1.3 billion, an increase of $200 million YoY, which reflected a net build in the allowance for credit losses. Citigroup’s net income was also impacted by the effective tax rate as it increased to 19.8% compared to 15.7% YoY.

Book value is an important metric for all companies but has more relevance with bank stocks because most banks’ assets and liabilities are constantly valued at market values. Tangible book value excludes the value of intangible assets such as goodwill. Intangible assets such as goodwill are not as easy to liquidate as tangible assets, so this is a stricter valuation on the entity.

Citigroup Q2 2022 financial results

Citigroup

Keep in mind that Citigroup closed at $49.98 on Friday, July 15th, after a 13.23% increase. The financials above were taken directly from the bank’s Q2 2022 financial results. The bottom block in bold indicates its book and tangible book value. The book value has increased by 1% QoQ from $92.03 to $92.95 and 2% YoY from $90.86 to $92.95. The tangible book value is more impressive to me as it increased 3% YoY from $77.87 to $80.25 and 2% QoQ from $79.03 to $80.25. Just on the tangible book value, there is a $30.27 spread between the current share price and tangible book, indicating that shares are at least 60.56% undervalued. If you look at a 1:1 ratio between book value and the share price, there is a $42.97 spread indicating that shares are undervalued by -85.97%.

How Citigroup compares to the other big banks

So far, Citigroup, JPMorgan Chase (JPM), and Wells Fargo (WFC) have reported, so I have updated the numbers since the last time I looked at these valuations. The remaining banks, including Bank of America (BAC), will be reporting throughout the earnings season, and I will do an update once all of the earnings are in.

I will compare Citigroup to the following banks:

  • The Bank of Nova Scotia (BNS)
  • U.S. Bancorp (USB)
  • Bank of America (BAC)
  • JPMorgan Chase (JPM)
  • Wells Fargo (WFC)
  • Royal Bank of Canada (RY)
  • The Toronto-Dominion Bank (TD)

Due to their operations, financial institutions need to be looked at differently from how I would evaluate the big tech sector or midstream operators due to their operations. Here are the different metrics I will utilize and why I elected to use them:

  • Price to Earnings P/E
    • A company’s P/E ratio is important in comparing with similar firms in the same industry.
  • Price to Book P/B
    • P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values.
  • Loan Deposit Ratio LDR
    • Indicates the bank’s liquidity.
  • Equity to Market Cap
    • Valuation the market has placed on the company’s equity.
  • Tangible book value to market cap
    • Tangible book value excludes the value of intangible assets such as goodwill. Intangible assets such as goodwill are not as easy to liquidate as tangible assets, and even though they have value, I believe finding the tangible book value is a more realistic measure of a company’s value. I wanted to see how the tangible book value compared to each company’s market cap.
  • Dividend Yield and Payout Ratios
    • Amount of earnings each company pays per share through its dividend and how much of its earnings are paid.
  • % difference between tangible book value and share price
    • Indicates if the market is discounting a company’s shares or placing a premium on them.
  • % difference between market cap and equity
    • Indicates if the market is placing a positive multiple on a company’s equity of discounting it.

Citigroup vs Big Banks

Steven Fiorillo, Seeking Alpha

Currently, Citigroup is trading at the lowest P/E valuation of its peer group. This seems to be a drastic valuation as the range outside of Citigroup is 8.36 – 10.28. You can never go by one metric as this only tells 1 part of the story.

Citigroup vs Peers P/E ratio

Steven Fiorillo, Seeking Alpha

In addition to trading at the lowest P/E ratio, Citigroup is trading at the lowest P/B ratio and by a significant amount. Only 2 banks in the group trade under a 1:1 ratio of price to book, and WFC is under that ratio by a hair. Citigroup trades at .54x book value which is crazy when you look at some of the other P/B ratios. The market is placing up to a 1.74x P/B on some of the big banks, and Citigroup can’t even get near a 1:1 level. This is a clear indication that Citigroup could be undervalued, and when you consider the P/E ratio, the picture is starting to look clear.

Citigroup vs Peers P/B ratio

Steven Fiorillo, Seeking Alpha

The LTD ratio is critical in assessing a bank’s liquidity. If this metric is too high, the bank may be susceptible to a bank run due to rapid changes in its deposits, meaning it may not have enough funds to cover its requirements. If the ratio is too low, it can indicate that a bank is not meeting its earning potential. Citigroup is in line with JPM and BAC as the three of them are within a 0.44 – 0.49 range. This is a good indication that Citigroup hasn’t overextended itself, as it has $641.38 billion of loans against $1.32 trillion in deposits.

Citigroup vs Peers LDR ratio

Steven Fiorillo, Seeking Alpha

The equity a company has on its balance sheet is what investors are left with after all of the liabilities are deducted from their assets. The lower the multiple, the higher the valuation the market has placed on a company’s equity. Anything over a 1x multiple means that the market has negatively valued the equity in a company. The market is extremely discounting Citigroup’s equity as the bank has more than double the equity on the books compared to its market cap. Citigroup has $199.63 billion of equity on its balance sheet, and its market cap is $97.06 billion. The next closest company is WFC with a 1.15x valuation, then BAC with a 1.03x valuation. This is a clear indicator that the market is devaluing Citigroup’s equity compared to its peers.

Citigroup vs Big Banks equity to market cap

Steven Fiorillo, Seeking Alpha

The tangible book value is the final metric that tells the story of Citigroup’s valuation for me. On its own, Citigroup has the largest tangible book value per share at $80.25. Next in line is JPM with $68.67, then RY with $43.89. Citigroup is the only company in this peer group that has a larger tangible book than its share price. When I look at the tangible book value to market cap metric, Citigroup trades at 1.6x, indicating that there is an additional 60% of tangible book value exceeding its market cap, while WFC trades at 84% (.84x) of its tangible book value. When I put all of the pieces together, Citigroup looks incredibly undervalued.

Citigroup vs Big Banks Tangible Book value per share

Steven Fiorillo, Seeking Alpha

Citigroup vs Big Banks Tangible Book value to market cap

Steven Fiorillo, Seeking Alpha

If Citigroup is undervalued, how much may it be undervalued by?

Citigroup is the only company in the peer group that has a negative premium on both its share price to book value and tangible book value. In the first block below, I put all of the current numbers. If Citigroup was to trade on a 1:1 valuation of book value, it would need to increase by $42.97, which is an 85.97% jump from where it is today. Given the fact that these banks have received up to a 40.88% premium on book value, it’s not out of the realm of reality that Citigroup should trade closer to a 1:1 valuation.

Looking at the 2nd block, Citigroup is trading at -$30.27 under its tangible book value, which is a -60.56% discount. WFC is trading at a premium to its tangible book, so Citigroup is the only outlier under its tangible book value. The market has placed up to a 51.83% valuation on some of these banks based on their tangible book.

I have no doubt in my mind that Citigroup is undervalued but determining by how much is impossible. If Citigroup was to be marked at a 1:1 on either of these metrics, shares would appreciate by $30.27 – $42.97 (60.56 – 85.97%). If shares of Citigroup were to trade at 75% of book or tangible book value, they would trade at $69.71 or $60.19. This would mean shares would need to appreciate by $10.21 – $19.73 for an increase of 20.42% – 39.48%. I think Citigroup could appreciate by at least 20.42% from its current levels and maybe as much as 85.97%. I know this is a large range, but the market has discounted Citigroup for so long that it may be difficult to reach a 1:1 ratio on book or tangible book anytime soon.

C

WFC

BAC

BNS

JPM

TD

USB

RY

Share Price

49.98

41.13

32.25

55.61

112.95

60.53

46.57

91.12

Book Value Per Share

$92.95

42.17

29.7

45.55

86.38

40.83

29.87

53.87

Share Price – Book Value

-$42.97

-$1.04

$2.55

$10.06

$26.57

$19.70

$16.70

$37.25

Book Value Coverage Ratio

1.86

1.03

0.92

0.82

0.76

0.67

0.64

0.59

Share Price Premium to Book

-85.97%

-2.53%

7.91%

18.09%

23.52%

32.55%

35.86%

40.88%

C

WFC

BAC

BNS

JPM

TD

USB

RY

Share Price

49.98

41.13

32.25

55.61

112.95

60.53

46.57

91.12

Tangible Book Value Per Share

$80.25

$34.66

$21.14

$35.71

$68.67

$34.33

$22.46

$43.89

Share Price – Tangible Book Value

-$30.27

$6.47

$11.11

$19.90

$44.28

$26.20

$24.11

$47.23

Tangible Book Value Coverage Ratio

1.61

0.84

0.66

0.64

0.61

0.57

0.48

0.48

Share Price Premium to Tangible Book

-60.56%

15.73%

34.45%

35.78%

39.20%

43.28%

51.77%

51.83%

Citigroup vs Big Banks share price premium to book

Steven Fiorillo, Seeking Alpha

Citigroup vs Big Banks share price premium to tangible book

Steven Fiorillo, Seeking Alpha

Conclusion

As bank earnings roll in, shares of Citigroup still look massively undervalued. From its peer group, Citigroup has the lowest P/E ratio, P/B ratio, and its equity and tangible book value trade at the deepest discounts to the current market cap. Shares have a tangible book value of $80.25, which is $11.58 more than JPM, yet shares of Citigroup trade at a 60.56% discount to tangible book. Citigroup is the only bank that hasn’t received at least a 1:1 valuation on its tangible book value, and its equity is discounted by more than 50%. It is yielding just over 4%, and we could see the market readjust its valuation more favorably in the future, which could lead to significant capital appreciation.

Be the first to comment

Leave a Reply

Your email address will not be published.


*