114 Billion Reasons Why Now is the Right Time to Buy Citigroup

Citi Holdings, the "toxic asset" division of Citigroup, is being wound down but still has well over $100 billion in assets. What happens when it's gone

May 4, 2014 at 9:00AM

Citigroup (NYSE:C) has done a great job of improving itself since the financial crisis. The company's overall asset quality and capitalization has improved, and this has resulted in nearly a 50% gain in tangible book value over the past four years.

However, there are still about $114 billion in legacy assets stashed away in the Citi Holdings division, which is one of the reasons the stock is so cheaply valued. The company's market cap is just $147 billion, so if a significant portion of these assets began to perform badly, it could put a serious dent in Citigroup's bottom line. The cheap valuation makes sense, for now, but what happens when Citi Holdings is gone?

What are Citi Holdings' assets, anyway?
Citi Holdings was created in 2009 for the sole purpose of giving Citigroup somewhere to put its toxic and unwanted assets. Most of what remains of the division's assets are mortgages, and we all know why pre-2009 mortgages might fit into the category of "toxic". There were also a few assets placed in the division simply because they were not part of the company's "core" businesses of banking, securities trading, and cash management.

Citigroup has made tremendous progress with its bad assets
The leftover "legacy assets" are held in the Citi Holdings division, and the good news is that these are being wound down at a pretty impressive rate. The company has made tremendous progress in this, and has reduced the asset size of Citi Holdings by more than 60% since 2011. At the current rate, the division should be gone within the next couple of years.

In fact, Citi Holdings "only" lost $284 million in the first quarter. Granted, this does sound like a lot, but not when compared with the $804 million loss during the first quarter of 2013! The division's assets are performing better than in previous years, with 28% fewer loan delinquencies. In fact, Citigroup has cut the division's loan-loss allowance to $6.1 billion from $9.4 billion last year.

What it could mean to Citigroup's earnings
Once Citi Holdings is out of the picture, it could mean a big boost to Citigroup's profitability. Citi Holdings loses money each quarter, and the division reported a net loss of $284 million during the first quarter, down from $422 million last quarter and $804 million a year ago. Although this is great improvement, a loss is still a loss.

Erasing the $284 million net loss would mean almost an extra $0.10 in quarterly earnings per share. Citigroup reported earnings of $1.23 per share for the first quarter, so if Citi Holdings' loss was eliminated, it would raise earnings by about 8% all by itself. That's not to mention the other ways the bank is improving, such as better capitalization, increased consumer lending, and more.

A "double" catalyst
Also remember that the rise in earnings is not the only positive catalyst here. Once Citi Holdings is gone, or at least wound down to a small fraction of its current size, the market will perceive Citigroup as a much less risky investment. As a result, not only would profits increase, but the company's valuation relative to its earnings would rise, as it would for any company that lowers its risk level.

Will this stock be your next ten-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers