Citigroup (NYSE:C) is one of the cheapest large banks in the market, trading for just 85% of its tangible book value. Despite this, the company has improved tremendously since the financial crisis, and continues to do so at an impressive pace. In fact, there are a few big ways Citigroup has outperformed its more "expensive" peers like Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM).
Its assets are worth much more than they used to be
Citigroup's tangible book value, or the value of all of its tangible assets, has grown at an impressive pace over the past few years. In the company's recent earnings report, it revealed tangible book has grown by 8% in the past year to $56.40 per share. Over the past four years, Citigroup's tangible book value has improved by nearly 50%!
In contrast, the growth in intrinsic value has slowed significantly in Citigroup's peers. JPMorgan's tangible book value improved by 6% since this time last year, and Bank of America's improved by a sluggish 3.3%. The better performance by Citigroup can be attributed to the very effective winding down of Citigroup's troubled "legacy" assets over the past several years, and implementing much more responsible lending standards than before the crisis.
What this means is even if Citigroup continues to trade at a discount to its tangible book value, which I think is unlikely, we should still see the share price go up. After all, 87% of $60 is more than 87% of $50!
Fundamentals improving faster than peers
Valuation aside, one of the most compelling reasons to invest in Citigroup is how it's improving its fundamentals quicker than its big-bank peers. According to the Basel III Tier 1 Common Ratio, which is considered to be indicative of a bank's financial strength, Citigroup is not only the most well-capitalized of the "big four" banks at a 10.6% ratio, but it has grown its capital faster than its peers:
I mentioned earlier how Citigroup grew its tangible book value at a rate of 8% last year. In contrast, its peers saw lower year-over-year improvement, with 5.5% TB growth for JPMorgan Chase and just 3.4% for Bank of America.
There are still hurdles, but these are good signs
Citigroup has definitely improved quite a bit since the crisis, but shares aren't cheap for no reason. The company has much more international exposure than peers, particularly in emerging markets, which was the main reason why Citi's capital plan was rejected by the government. There is simply no way to know the full effect of a global downturn on the bank's profits.
Additionally, while Citi Holdings (the legacy assets) has been reduced significantly, there are still about $114 billion in assets in the division, and this could be a big burden in another U.S. market crash. Citigroup's entire market cap is just over $142 billion, so if a significant percentage of the legacy assets went bad all of a sudden, it could mean a big hit to shareholders.
Having said all of this, Citigroup's incredibly cheap price makes it worth taking a chance on. If the past few years are any indication, the company will continue to aggressively reduce its exposure to bad assets and improve its capital levels. It's a matter of when, not if, the bank will be allowed to return more capital to its shareholders, and when this happens, the stock won't be on sale forever.
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