Please ensure Javascript is enabled for purposes of website accessibility

Is Citigroup the Best-Managed Large Bank in America?

By Alex Dumortier, CFA - Apr 21, 2016 at 2:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Citigroup was the only large bank to pass the Fed and the FDIC's latest test, highlighting the scale of improvement at an institution that investors left for dead.


Source: Hakan Dahlstrom Photography, republished under CC BY 2.0.

Is Citigroup, Inc. (C -0.06%) the best-managed bank in America? I'll save you the suspense: The answer is no. But it's better managed than the market believes, and for stock pickers, that's a valuable observation.

Want proof? Last Wednesday, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly announced that Citi was the only bank among the top eight U.S. banks to receive a qualified approval from both regulators on its living will.

A living will -- "resolution plan" is the official term -- is a plan for winding down a too-big-to-fail institution in a manner that prevents a system-wide crisis.

That "win" clearly caught investors by surprise: Citi shares rose 5.6% on the day, versus a 3.8% gain for the KBW Bank Index (DJINDICES: ^BKX). (The entire sector got a lift from JPMorgan Chase's earnings that day.)

Who's the worst?
In the wake of the global financial crisis, too-big-to-fail banks have faced enormous skepticism on the part of the market, but none more so than Citi, and that's perfectly understandable. When former FDIC chairperson Sheila Bair was asked point blank in 2011 which bank was the worst, she answered:

"During the crisis I said Citigroup was a basket case, Merrill Lynch was a basket case. These thrifts, Countrywide, Golden West, WAMU [Washington Mutual], they were all in serious trouble."

Among that list, only Citi survived as an independent entity. The others failed or were acquired -- and gave their acquirers an expensive case of indigestion. Citi doesn't owe its survival to good luck: Chalk it up to the government's making two capital injections totaling $45 billion -- matched only by Bank of America Corp. -- and providing loss guarantees on a $306 billion pool of assets.

The "basket case" discount
Thus, over the past five years, Citi shares have traded at an average 33% discount to their peer group average price-to-book value multiple and a 12% discount on the basis of price-to-forward earnings, according to data from Bloomberg. The market left Citigroup for dead.

But institutions change, and 2016's Citigroup is a far different organization than 2008 Citigroup. Before becoming CEO, Michael Corbat oversaw the sale of 40 businesses and divested over $500 billion in assets at the head of Citi Holdings, the unit that houses the bank's non-core assets. The running total is now over 60 businesses and $700 billion in assets.

From worst to first
And there were clues that should have tipped investors off that Wednesday's success was completely plausible.

In March 2015, the Federal Reserve awarded Citigroup the cleanest pass on its capital return program among the top banks participating in the annual round of "stress tests."

That wasn't dumb luck: Citi had suffered an embarrassing failure on the same exercise a year earlier, prompting Corbat to stake his job on winning a pass in 2015. Now that's real motivation for you -- the kind that reverberates throughout the organization.

The bank then spent $180 million to improve its capital planning process. That had immediate benefits when it comes to drawing up a resolution plan, since the preferred resolution strategy under the Dodd-Frank Act is to recapitalize a bank's major operating subsidiaries before the failure of the parent company.

Going on page length alone (see the following table), it would appear that Citigroup's 2015 living will was the most explicit and comprehensive. In sum, Citi had put more care and effort into the exercise than its peers did.

Institution

Resolution Plan Page Length (Public Summary)

Citigroup

102 pages

Goldman Sachs

86 pages

Bank of America

63 pages

Bank of New York Mellon

68 pages

Morgan Stanley

60 pages

State Street

57 pages

JPMorgan Chase

53 pages

Wells Fargo

38 pages

Source: Federal Reserve.

I admit, though. that page length is a crude measure to infer the quality of the plan, particularly since these are the public summaries only. Some banks may simply have chosen to be more concise.

And the Fed and the FDIC did identify specific issues in Citi's plan that require improvement. However, these are qualified as "shortcomings" rather than the "deficiencies" found at the other banks that render a plan "not credible,"

From zombie to winner
For investors, what does this all mean? The greatest living will in the world doesn't ensure a bank is earning its cost of capital. Indeed, Citigroup is not currently earning its cost of equity, so it's no surprise the shares continue to trade at a discount to its book value and even to its tangible book value.

Still, this latest "win" for Citigroup is more proof that the bank is hugely improved under Corbat's leadership. I expect the improvements to continue and the gap with book value to narrow, and while the market caught a glimpse of this last Wednesday, I think it has yet to be fully reflected in the stock price.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$49.75 (-0.06%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.