Investors should take a close look at Citigroup (C 0.51%) and its out-of-touch valuation. Despite strong underlying business fundamentals and improvements on the cost front, the bank still trades at a sizable discount to tangible book value.
With a better outlook for bank earnings accompanying a growing U.S. economy, Citigroup looks like a real bargain.
Strong core business driving Citigroup's intrinsic value
Citigroup's low earnings and book value multiples show that investors are still not warming up to the nation's leading consumer bank.
But this may be a mistake.
Citicorp, Citigroup's consumer bank franchise, has presented solid performance improvements in terms of revenues, cost controls and loan and deposit growth over the last three years.
Citicorp's revenues have increased from $69.1 billion in 2011 to $72.2 billion in 2013; an increase of 4%. While the growth rate may not cause excitement, investors need to realize that the banking sector went through a deep-cutting restructuring phase during those years, so a 4% growth rate is actually quite a good number.
At the same time, Citicorp reduced its efficiency ratio from 63% in 2011 to 58% in 2013. The efficiency ratio is an important performance metric for banks and tells investors how much it costs a bank to generate $1 of revenues (the efficiency ratio does not include interest expenses).
More importantly, Citicorp's core business has been growing respectably since the first quarter of 2011. Consumer loans increased 10% over the last three years to $296 billion and corporate loans grew 50% since the first quarter of 2011 to $279 billion, thanks to overall low interest rates.
Citicorp's deposits also highlight strong growth in both consumer and corporate segments. Consumer deposits increased 6% over the last three years whereas corporate deposits grew even faster at 26% to $600 billion.
Source: Citigroup Investor Presentation
Persistent book value discount
If one looks at Citigroup's performance record, results have been actually quite good: Revenues are stabilizing, the firms runs a tight ship in terms of cost controls evidenced by a decreasing efficiency ratio and its underlying business fundamentals, deposit and loan trends, are more than healthy.
Despite operational improvements, Citigroup trades at a sizable discount to tangible book value. In the first quarter of 2012 Citigroup reported a tangible book value per share of $50.90 which has, with the exception of the fourth quarter 2012, consistently grown on a quarter-over-quarter basis to $56.40 in the most recent quarter.
Therefore, Citigroup still trades at a roughly 13% discount to tangible book value.
