The Denver Broncos -- according to Bleacher Report -- are currently favored to beat the Seattle Seahawks by two to three points in this year's Super Bowl. The Broncos are unquestionably an offensive juggernaut, so maybe you like those odds.
What if, however, the spread was 20 points, or even 30 points? Would you still bet on the Broncos because you thought they were the better team?
When it comes to football, the answer is simple. That's just too high of a hurdle to jump. Why, then, don't we use similar logic for evaluating stocks?
Wells Fargo (NYSE:WFC) is a fantastic business, and one I consistently endorse. The same can be said for Bank of America (NYSE:BAC). Both banks -- though the valuations are still favorable -- are trading above tangible book value, or, the value of all the company's assets minus intangibles, such as name brands.
Citigroup (NYSE:C), at least for the time being, is trading below tangible book value. It's time to take a closer look at Citigroup, and five of the reasons it shouldn't be overlooked.
1. Cutting down Citi Holdings
Citigroup has separated the company into Citicorp, or "Good Bank" and Citi Holdings, or "Bad Bank." The process of cutting down non-core assets in "Bad Bank" will be the story for Citigroup for the next two to who knows how many years.
According to Citigroup's CEO Michael Corbat, "With a $39 billion reduction in assets, we shrunk its size by 25% in 2013." This means Citi Holdings, to date, accounts for just $117 billion, or 6%, of Citigroup's over a trillion dollars in assets.
Corbat was adamant that he won't get overly aggressive with the winding down of Citi Holdings, "Simply to get a headline GAAP reduction." We have, however, seen good progress that investors should expect to continue into 2014.
2. Becoming more efficient
Efficiency ratio is a quick way to determine how well a bank is able to turn its resources into revenue, and just like in golf, the lower, the better.
When looking at Citigroup and Bank America, it's important to factor in the bank's significant legacy issues.
Citigroup, for instance, had an efficiency ratio of 67% in the fourth quarter -- however, when excluding Citi Holdings, the ratio drops to 63%. Going a step further, Citicorp's global consumer banking had an efficiency ratio of 55%. Both are great signs that Citigroup's core business is in better shape than it looks on the surface.
3. Deposit growth
|Company||4Q 2012||4Q 2013||Percent Change|
|Citigroup||$931 billion||$968 billion||4%|
|Bank of America||$1.1 trillion||$1.1 trillion||1%|
|Wells Fargo||$976 billion||$1.1 trillion||13%|
Collecting low-cost deposits is one of the hardest jobs a bank has to do. There are few, if any, better than Wells Fargo -- but we have seen some improvement from Bank of America, and significant improvement from Citigroup.
4. Getting back to core business
This has become a bit of a buzz phrase for Citigroup since Corbat has taken over, and to his credit, it's done a nice job rallying the troops.
Citi has a very unique global footprint, but it's one that's gotten a little bloated over the years. The focus for the next -- and I won't try and forecast a timeline -- so many years, will be to make sure its presence is in the right places.
The one thing that really gets lost in translation is the cost of "repositioning." There are significant costs that go along with closing branches, and it had an impact on fourth-quarter earnings, but like the legacy issues, they won't last forever. As these extraneous costs start to dissipate, it should unveil -- and the same could be said for Bank of America -- the strength of Citigroup.
5. Strong capital ratio
Every CEO should have Under Armour's slogan -- "We must protect this house" -- taped on the wall of their office. This means fulfilling capital ratios.
Unlike other metrics, capital ratios are pass-fail. Meaning, while it looks like Citigroup is in a better financial position than Wells Fargo it's a sign (if it wasn't obvious already) that Citigroup is playing defense. Wells Fargo, however, is in beast mode and not holding much more capital than is absolutely necessary.
The time for aggressive action will come for Citigroup, but for now, investors should feel really good about Citi's financial security.
Who are you betting on?
Cheap stocks are consistently viewed as being more risky, which, to be fair, is often the case. There are times, however, when stocks become so beaten-down, and the hurdles to jump are so low, that these inexpensive stocks carry the least amount of risk.
Corbat has outlined a very specific and easy-to-understand plan for Citigroup to globalize, digitize, and urbanize. A plan that has been implemented, and we've seen real progress in a very short period of time.
While Bank of America and Wells Fargo are great investments in their own right, in this investor's opinion, Citigroup is the best investment of the three.