With shares of major banks near their 52 week highs, it looks like the entire industry is coming back to life. But Citigroup (NYSE:C) shares have been held down by both past and current events leading to disappointment for shareholders who bought over the past year.
The ugly past
Anyone who has followed the markets knows that banks stocks were among the hardest hit in the 2008 financial crisis. But Citigroup takes the cake for biggest losses to date for shareholders.
|Bank||Share price performance (1/1/2008-3/21/2014)|
|Bank of America (NYSE:BAC)||-58.4%|
|JPMorgan Chase (NYSE:JPM)||+33.1%|
|Wells Fargo (NYSE:WFC)||+63.4%|
This was due to extreme share dilution resulting from a bailout package funded by the government. Before the reverse stock split, there were enough Citigroup shares for every person on Earth to have about four of them.
On top of massive share dilution, a reverse stock split, and terrible share price performance, Citigroup was also left with billions in toxic and non-core assets that continue to exist at the bank today.
The ugly present
Just as Citigroup shares were reaching new post-crash highs in January, concerns over emerging markets hit world markets. Among the victims: Citigroup which considers itself internationally diversified, thereby giving it more emerging markets exposure than the other big U.S. based banks.
Just as investors may have been able to begin to brush aside emerging markets concerns around Citigroup, the bank revealed a case of fraud at its Mexican unit, Banco Nacional de Mexico better known as Banamex, that would result in Citigroup's 2013 profit to be $235 million lower. For Citigroup, the $235 million itself is largely insignificant; the real problem is concerns over corporate governance and other possible cases of fraud. As the investigations continue, investors will be closely watching how things shake out.
With this poor record and present concerns, its no surprise that Citigroup has the lowest valuation among big bank stocks. It's the only one to trade below tangible book value, sharing this less than ideal distinction with Bank of America.
Citigroup also trades cheaper based on forward earnings than any of its peers, holding an 8.8 times forward earnings ratio, compared to JPMorgan Chase that trades at 9.5 times, and Bank of America and Wells Fargo that both trade above 10 times.
But is this discount warranted? To answer that question, we should take a look at what Citigroup is doing to address its present issues.
Fixing the problems
First up on the list is resolving remaining issues left over from the 2008 crisis. To wind down non-core assets, Citigroup shifted many of them into Citi Holdings which is in the process of handling this wind down. Citigroup can't undo its poor share price performance in the couple years following the collapse, but if it can post better future performance, investors should begin to have a more forward looking view on the bank.
On the international front, Citigroup has actually put itself in a fairly good long-term position. By expanding into emerging markets, Citigroup is developing business relationships with customers before other major U.S. based rivals can grab the market share. Although it may cause some short term hiccups, Citigroup's international exposure is diversified across many markets to both create a true global presence and protect the bank from market failure in any one specific country.
The issue of potential fraud is one that investors need to keep an eye on, however, it appears to be under control at this point. Investigations are continuing but so far no larger contagion of fraud has been uncovered at the bank..
Investing for the long-term involves being patient even when the market does not yet realize value. In the case of Citigroup, shares underperformed the market in 2013 but now appear to be the best value among major banks.
Once Citigroup can leave its ugly past further behind, the market can focus on current value rather than past losses. Looking through 2014, investors should watch for catalysts in the form of increasing earnings, a dividend increase, and additional share buybacks.