In early 2022, Warren Buffett and his investing team at Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) made a splash by buying $3 billion in shares of Citigroup (C 1.41%).
At the time, Citigroup was experiencing seismic change under new CEO Jane Fraser. The stock's valuation was hovering well below its peers, still hobbled by a poor reputation and memories of its 2008 government bailout. Fraser promised a way out through targeted cost-cutting, which she believed would make the bank more efficient -- and profitable.
Nearly two years later, you can still buy Citigroup stock for about as much as Buffett and Berkshire Hathaway did. Should you?
Fraser is still working her magic
When Fraser took the reins from longtime CEO Michael Corbat in March 2021, the task ahead was monumental. In nearly every valuation multiple, Citigroup lagged the industry average. Profitability metrics were commensurately lower. And despite heavy fluctuations, shares had ultimately traded sideways for over a decade.
Fraser's plan was to simplify Citigroup's footprint, slashing entire divisions while cutting thousands of middle-management positions that she believed hindered the company's ability to respond quickly to market conditions. In a way, her restructuring vision emulated Buffett's strategy at Berkshire Hathaway. That is, Fraser wanted Citigroup's portfolio to focus on its most promising bets, with managers empowered to make important decisions about the areas they understood best.
Since Buffett jumped in, much of Citigroup's restructuring has tracked expectations. The bank reduced managerial layers from 13 to eight, eliminated 60 committees, shut down many foreign business units (including its global distressed-debt operations), and is now in the process of shedding thousands of positions, many of which are high-cost executive roles. Five of the bank's remaining divisions now report directly to Fraser, highlighting her emphasis on efficiency.
There's just one problem: everything is taking longer than expected. Nearly three years after Fraser took over, the restructuring continues. Every quarter, it seems, more disruptions are revealed. In 2023 alone, around $1 billion was dedicated to restructuring efforts, covering costs like buyout packages and early severance.
Fraser is making progress, but the market remains skeptical, refusing to assign Citigroup stock a higher valuation until it proves that brighter days are ahead.
Citigroup stock can't earn any respect
Despite years of restructuring, Citigroup shares still trade at a 45% discount to book value, an easy-to-use metric that gauges how the market is valuing a bank's assets. Berkshire's largest bank holding, Bank of America (BAC -0.21%), trades at 104% of book value at recent prices, while Wells Fargo (WFC -0.03%), a former Buffett favorite, is valued at 111%. That's a huge gap.
Why can't Citigroup earn any respect? Quite simply, the bank isn't able to squeeze as much profit out of its asset base. At their core, banks are essentially leveraged bets on a lending portfolio. A bank will borrow money at a certain rate, and lend that money out at a different -- hopefully higher -- rate, capturing the difference as profit. Banks typically use debt, or leverage, to boost those returns.
A quick way to determine how well a bank is doing, then, is to assess its return on equity, which takes into account both how profitable the bank is plus how well it is using leverage to boost returns. Last quarter, Wells Fargo posted a return on equity of around 11.5%, close to its trailing five-year average. Bank of America, meanwhile, generated a return on equity of 12.2%, one of its best quarters in years.
How has Citigroup fared? Last quarter, returns on equity were just 7.3%, pretty close to its average since 2010. With that in mind, it's not hard to understand why the market is willing to pay a lot more for the assets of Wells Fargo and Bank of America. Both companies are able to squeeze more shareholder profit out of each dollar invested.
C Price to Book Value data by YCharts
Will Buffett stick with Citigroup?
Since getting involved, Buffett and Berkshire have just about broken even on their Citigroup investment. They haven't sold a single share, so it seems Buffett is still a believer.
What can we expect from Citigroup moving forward? Fraser now promises that the latest restructuring efforts will conclude by March. Perhaps then the company can finally ascend toward its return on equity targets, which Fraser believes should be between 11% and 12%. If that happens, the stock would undoubtedly see a huge rerating. Trading in line with peers like Bank of America and Wells Fargo, the stock would nearly double in value.
The market is clearly in wait-and-see mode, though. It will assign shares a higher value once Citigroup proves that it is worthy. Over the next 12 months, it should become clear if Fraser can pull off a turnaround. Restructuring costs should begin to fall, and if all goes to plan, returns on equity will improve.
This is likely what Buffett is betting on, and if you'd like to follow suit, you can still pick up shares for roughly what he and his team paid nearly two years ago. Just know that a bet on Citigroup today hinges on one major factor: that its restructuring days will soon be behind it.
