The Right Way to Think About Citigroup

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It wasn't all that long ago that I was positively bearish on Citigroup (NYSE: C  ) , lumping it in with Bank of America (NYSE: BAC  ) as a financial leviathan still deeply damaged from the banking crisis, still far from turning the corner back into operational normalcy, and therefore not a safe, profitable place for investors to put their money.

Citi is still a leviathan, but it is turning that corner more quickly than I'd previously thought possible -- quickly enough to convince me to buy a few shares as a sort of test run. Here's a quick overview of how I think the bank is still currently viewed by investors and how I think it should be.

A glass half empty
Of the big four banks, B of A was unarguably damaged the worst in the financial crisis, but Citi wasn't far behind. Both banks overindulged in the housing boom, and ended up with massive amounts of toxic mortgage debt on their books.

Citigroup put its bad assets into a "bad bank" called Citi Holdings, which moved the toxic debt off the main balance sheet but didn't absolve the superbank -- or its investors -- of the responsibility to deal with it. In the most recent quarter, Citi Holdings cost Citigroup $1.1 billion in losses. In the first half of 2012, the losses totaled $2.02 billion.

Also, since the financial crisis, I think the leadership at Citigroup has mainly been at a loss as well. Vikram Pandit, the bank's former CEO who came on in 2007, needs to be given credit for stabilizing the bank at what was undoubtedly its moment of extreme crisis (and repaying $45 billion in federal bailout money ), but also needs to take the blame for not maximizing the superbank's significant assets.

One example of this is the sale of the remainder of Morgan Stanley Smith Barney back to Morgan Stanley (NYSE: MS  ) last fall. It's generally thought that Citi botched the deal, coming around too easily to Morgan Stanley's lowball valuation of the joint enterprise. The superbank ended up losing $2.9 billion on MSSB.  

A glass half full
The good news regarding Citi Holdings is that the bad bank's balance sheet and losses are both on the decrease.

In the fourth quarter of 2011, Citi Holdings' net loss was $1.3 billion, but was just $1.1 billion a year later. And total assets in the bad bank were $156 billion for Q4 2012, 31% lower than for Q4 2011. Finally, the continuing resurgent housing market means poorly performing assets might get even more of a boost in the right direction moving forward.

As for leadership, it's no secret that Pandit is now gone -- replaced in a coup engineered by Citigroup chair Michael E. O'Neill last October -- but exactly how his successor would behave is no longer a secret.

Michael Corbat was O'Neill's handpicked replacement for Pandit and is a well-regarded 30-year veteran of Citi who took over the bank's global wealth-management unit at the height of the financial crisis. Most recently he ran Citi Holdings. 

But more impressive than his background is the way he's handled himself since he assumed the role of CEO. In his first statement, he humbly acknowledged the work his predecessor did in beginning to turn the bank around.  Then, in a statement to a group of Citi executives in February, he said: "You are what you measure." This was an attempt to succinctly explain how bank executives and their performance would be judged moving forward.  

While perhaps not as emotionally satisfying as a typically brash statement from JPMorgan Chase CEO Jamie Dimon, it's clear to me that Citi needs a measuring man like Corbat much more than it needs a swashbuckler like Dimon.

Finally, just weeks ago, Corbat conspicuously didn't request a dividend increase or significant share buybacks from the Federal Reserve, even after his bank did decidedly well on its 2013 stress tests. To me, it's a sign that he's more concerned about the long-term health of his bank than the short-term happiness of his shareholders.

Foolish bottom line
This article isn't meant to be the end-all, perfectly persuasive pitch to buy Citi. Citi still has a ways to go before it's operating completely normally and at its full potential for profit, but I think it's turned a corner and is worth taking a chance on right now.

Looking for in-depth analysis on Citi? If so, look no further than our new premium report on the superbank.

In it, Matt Koppenheffer, The Motley Fool's senior banking analyst, will fill you in on both reasons to buy and reasons to sell Citigroup. He'll also clue you in on what areas investors need to watch going forward. For instant access to Matt's take on Citi, simply click here now.

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