When the words "Citigroup (NYSE:C)" and "opportunity" make an appearance, one number is hard to miss: 0.6. That's the bank's current price-to-book value multiple, and what it says is that either the global banking giant still has a lot of losses ahead, or it's a screaming bargain.
Ahoy, there! Risks ahead
There are reasons to think that the former could be true -- that Citi has hefty losses yet to come. For one thing, the sins of the pre-crisis financial euphoria are still coming to light via the court system, and the payouts and potential payouts for these suits haven't been small numbers. In August, Citi paid $590 million to settle a shareholder lawsuit over soured mortgage bonds that it sold. In September, the bank, along with Goldman Sachs (NYSE:GS) and UBS (NYSE:UBS), was sued by Germany's IKB over even more soured mortgage bonds. Open up the financial pages on even a weekly basis, and you're bound to see plenty of other bank-related lawsuits of one flavor or another.
Meanwhile, Citigroup is still working down a $177 billion sequestered portfolio of assets it wants to dispose of. During the third quarter of 2012, that arm of the company -- which it calls "Citi Holdings" -- lost $679 million. That was down from a $1.3 billion loss in the third quarter of 2011, but it's still nothing to sneeze at.
A bank on the mend?
With all of that in mind, though, there's still a case to be made that Citi's stock is exactly what it looks like: A seriously undervalued bank stock that's going to deliver big returns as investors realize that it's no longer 2008. Excluding major non-cash charges, the bank delivered more than $3 billion in profit on $19 billion in revenue during the third quarter. With a 13.9% Tier 1 capital ratio under current Basel I standards, Citigroup's capital buffer is impressive -- especially considering where it was just a few years ago. And at the core of all of this is actually a very valuable global banking franchise. To be sure, its image has taken a battering since the financial crisis, but the Citigroup brand is still considered a top-50 global brand by brand expert Interbrand.
Finally, with a significant management transition under way, there's reason to believe that the true banking activities under the vast Citi umbrella will once again be the focus of the company. With the exit of Vikram Pandit and the promotion of 30-year Citigroup veteran Michael Corbat, it appears that the bank may be deemphasizing riskier activities that got it into trouble and putting the focus more squarely on the core banking business.
Make no mistake about it -- there are serious risks involved in an investment in Citigroup. But for investors with a higher-than-average risk appetite, there's an intriguing bull case to be made here.