C - Citibank

[gordoffh]

I had been starting to build a position in C with leaps and common. I was wondering what the feeling was out there re the reverse spllt. From what I have seen in the past stocks normally trended down after the consolidation. I believe a dividend was to be added. Comments..

[bmichaud]

What does the reverse split change?

[ericd1]

Nothing...except if the price is high enough some institutions can buy it.

[PlanMaestro]

I had been starting to build a position in C with leaps and common. I was wondering what the feeling was out there re the reverse spllt. From what I have seen in the past stocks normally trended down after the consolidation. I believe a dividend was to be added. Comments..

 

A potential effect is that it could lower the volatility of the stock and in consequence impact the short term value of the leaps. Now, if you think like myself that Citibank has a $30 billion earnings power these issues should not affect much your decision.

[stahleyp]

Have you guys check out the warrants at all?

[alertmeipp]

I will buy warrants after the RS. Save $ on commission.

IB charges me lots on those penny securities.

[jb85]

So it seems they'll prob be earning $1 a share in a few years, but I guess what I always struggle with on options is its basically betting how quick it will return to IV, not IF it returns to IV.

 

I mean looking at the C call options, they look very cheap.  here is one scenario for the 2013 expire date options:

 

buy the $7.50 strike price for $.12.  If it goes to coservative EPS of $1/share, 10x multiple gives you $10 a share.  if it hit $10 before 2013 you make 20X your money.  Those odds seem good, I'm just not sure it'll get to $10 by then.  Anyone else have any thoughts on the options?

[S2S]

When will they earn $1 a share (pre RS) exactly? My quick lookup shows that they earned 35 cents in 2010, with sell-side's consensus estimates for 2011 and 2012 at 43 cents and 54 cents respectively.

[jb85]

My assumption is that the earnings right now are still depressed... ROE has been around 6% or so the past few quarters, but that is largely because they are still accounting for and working through troubled loans on their books.  If C can get to 12% ROE, which is not that unreasonable, their earnings per share would be in the $.75 to $.80 per share range.  that assumes no growth as well.  Using a 10x multiple that gets you 7.50 as a share price.  In my mind those are pretty conservative numbers.  Its just a question of how long it takes to get the losses off the book. 

 

Being less conservative, looking at 2001, C had a book value per share of around $15 and traded at low of around 33 (more like around 40 for most of the year).  Today book value is $5.  Using a very simplistic ratio, of 2x of book value, that means C would be in the $10 or $11 range.  (Could easily be more like $14 or $15).  I know that is really simplisticbut i think if you assume no more recessions for the next few years, then i think that is a good picture for C long term in a realitively stable environment.

 

Of course all of this doesn't mean earnings will be back up anytime before 2013.  I guess that is the gamble with the options.  the reason i'm looking is the payoff seems pretty good.  now just trying to get an rough estimate of what the odds are that earnings go up by 2013.  if anyone has any ideas on that, i'd be interested to hear

[S2S]

I don't disagree with much of what you wrote, but those numbers are hardly conservative. C depends a lot less on leverage now than it did in 2005, and leverage will decline even further once they have to shore up capital to comply with Basel II and III... which means ROA will need to be at least as high as the heyday to get a 12ish % ROE. They might just be able to pull that off, bit keep in mind that their international business is already running on all cylinders... so a bet on C effectively means being very bullish on the US economy, credit and housing markets.

 

Getting to 2 times book (which I don't think any moneycenter banks deserve afterwhat we just went through) from .8 times book requires a similar leap of faith.

[ERICOPOLY]

My C options are $2.50 strike.  I figure the odds are high that at this point the tangible book value will support the stock, and today it trades at roughly tangible book value.  It only needs to hobble along at slightly more than 10% growth rates of tangible book to get me 20+% returns.  Tangible book will be easy to grow because they have those NOLs.  If the stock dips below tangible book, there's a long way to go down to $2.50.  Worst case, the options expire worthless and I just buy more at $2.50 strike waiting for the recovery.

 

[PlanMaestro]

I don't disagree with much of what you wrote, but those numbers are hardly conservative. C depends a lot less on leverage now than it did in 2005, and leverage will decline even further once they have to shore up capital to comply with Basel II and III... which means ROA will need to be at least as high as the heyday to get a 12ish % ROE. They might just be able to pull that off, bit keep in mind that their international business is already running on all cylinders... so a bet on C effectively means being very bullish on the US economy, credit and housing markets.

 

Getting to 2 times book (which I don't think any moneycenter banks deserve afterwhat we just went through) from .8 times book requires a similar leap of faith.

 

Pre-tax pre-provision earnings 2010: $39 billion

[S2S]

My C options are $2.50 strike.  I figure the odds are high that at this point the tangible book value will support the stock, and today it trades at roughly tangible book value.  It only needs to hobble along at slightly more than 10% growth rates of tangible book to get me 20+% returns.  Tangible book will be easy to grow because they have those NOLs.  If the stock dips below tangible book, there's a long way to go down to $2.50.  Worst case, the options expire worthless and I just buy more at $2.50 strike waiting for the recovery.

 

 

the majority of Citi's deferred tax assets only applies to US-based profits, which suits them fine... IIRC analysts model $4-5B use of DTA annually. Upside would, again, depends on positive surprise to the turnaround of their US businesses.

 

Congratulations on owning these options - I'm guessing you bought them early.

[ERICOPOLY]

My C options are $2.50 strike.  I figure the odds are high that at this point the tangible book value will support the stock, and today it trades at roughly tangible book value.  It only needs to hobble along at slightly more than 10% growth rates of tangible book to get me 20+% returns.  Tangible book will be easy to grow because they have those NOLs.  If the stock dips below tangible book, there's a long way to go down to $2.50.  Worst case, the options expire worthless and I just buy more at $2.50 strike waiting for the recovery.

 

 

the majority of Citi's deferred tax assets only applies to US-based profits, which suits them fine... IIRC analysts model $4-5B use of DTA annually. Upside would, again, depends on positive surprise to the turnaround of their US businesses.

 

Congratulations on owning these options - I'm guessing you bought them early.

 

I have been holding C since last January at about $3.30.  But I actually bought those $2.50 strike last week in my RothIRA.  They have little volatility premium... it's a bit like leveraging on cheap margin (with no margin call risk).  As of this writing the account is levered 1.1x.  I bought the 2012 calls because I paid very little premium compared to the 2013 calls, and in 2012 they'll start the dividend.  I can trade out of it if we get another nice spike.  I already did trade out of C calls in that account earlier this year.  It's where I trade my C calls -- no tax.  I love RothIRAs so much -- hands off my money.

 

 

[twacowfca]

I had been starting to build a position in C with leaps and common. I was wondering what the feeling was out there re the reverse spllt. From what I have seen in the past stocks normally trended down after the consolidation. I believe a dividend was to be added. Comments..

 

A potential effect is that it could lower the volatility of the stock and in consequence impact the short term value of the leaps. Now, if you think like myself that Citibank has a $30 billion earnings power these issues should not affect much your decision.

 

That is an astute observation about the likely change in vol reducing the relative value of the leaps.  :o

[NormR]

Anyone have the stats on consolidations in general?  IIRC, they tend to be a negative short-term indicator.

[ERICOPOLY]

Citicorp's growth:

6%   consumer loan growth YoY

16% corporate loan growth YoY

 

It's a bit strange.  I would consider that material, interesting information, however when you find the typical article about Citi in the media they speak only about declining revenue:

 

http://news.yahoo.com/s/nm/us_citigroup

 

[rjstc]

  In my accounts today C shows they did their 10 for 1 reverse split.

[ERICOPOLY]

 

And here is a headline from April 18th:

 

(Reuters) - Citigroup Inc's first-quarter profit fell 32 percent as shrinking loans and poor trading results pressured revenue while expenses surged.

 

It's clever how they can spin the asset sales of CitiHoldings into "shrinking loans". 

[Uccmal]

Post from sswan:

 

http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=4916.60

 

Anyone had a look at C.

[PlanMaestro]

The C warrants are way out of the money. So I suppose the discussion here is not about survival but more on valuation? C has the tremendous advantage that they did not have a large US mortgage operation (they have some international), so those clouds are in the past. Their credit indicators are improving very fast and are very strongly capitalized, far better than BAC. Some of their strengths are the Mexican operation (Banamex) and Credit Cards.

 

I remember Berkowitz estimating $10 per share stabilized PTPP, and it looks a little bit aggressive but not too far off. If they can manage to double their earnings by 2019 (9-10% growth) and apply a 10x PTPP multiple, that might be a $200 target by 2019. With the A warrants at around at $0.45 ($4.5 adjusted I think) the 300x looks like a pipe dream and the B warrants are too out of the money for me (and they need C to get to $300 to get that 300x, more of a 20x with C at $200)

 

But a 20x for the As...

[Uccmal]

I worked this out a bit.  Aside from never having looked at citi's balance sheet which precludes any investment, and having no intention to do so, these warrants are way out of the money and likely to stay that way to the bitter end.  Since the stock consolidation one now needs 10 warrants to hit the exercise price.  Or looking at it another way the exercise price per warrant has gone up 10 times to 101.16 or 178.90 (thereabouts).  Citi is trading at 28/share and has a market cap of 80 b.

 

What are the odds of C reaching 200 per share in 7.5 years - market cap of 560 b.  Very low i would suggest - like zero.  Why the warrants have anY value at all is beYond me.

[beerbaron]

I did the same math, they are way overpriced. I'd pay maybe 0.05$ for the class A. Not 0.50$!

 

BeerBaron

[ERICOPOLY]

I've been looking over their latest presentation again.  The one from 7/27:  http://www.citigroup.com/citi/fin/index.htm

 

Look at the slide #10 and they list the loan trends for the trailing 12 months of the segments in Citicorp:

Corporate loans grew 22%

Consumer loans grew 11%

Collectively, loans grew 16% in Citicorp

 

Within the consumer segment, Asia loans grew 20% and Latin America loans grew 25%.  Collectively they now comprise 53% of the consumer pie.  North America loans grew only 1%.  Going forward, it looks like Asia and Latin America grows from 53% to a much bigger slice of the pie.  Still a "US" bank?

 

CitiHoldings loans shrunk 33%.  At that pace, only two more years of drag of that size. (or several more years with much lighter drag).

 

Alright, when we talked about this a while back it was determined that the total assets would shrink.  But that hasn't happened yet. 

 

Q2 2009:  $1.849 trillion total assets

Q2 2010:  $1.938 trillion total assets

Q2 2011:  $1.957 trillion total assets

 

Over the past 12 months, assets in Citicorp have increased by $169 billion (14% increase), and assets in CitiHoldings have decreased by $157 billion (34% decrease).

 

Now, what if over the next 5 years they manage to completely run down CitiHoldings and keep the total assets at today's level of $1.957 trillion.  Pandit gave a range of 1.2% to 1.5% ROA as to what we can expect from Citigroup in the future when things settle down.  That would be about 24b or 30b net income.  Or today's stock price is about 3.5x or 2.8x that future level.

 

So maybe Berkowitz is right about a $100 per share price tag (last year he threw out $10 per share)?  I figure he used that 1.5% figure on the $2 trillion assets (roughly what it is today including holdings and corp/other).

 

I figure I must be high or something to come to the conclusion that it's possibly trading at 3.5x or 2.8x normalized earnings right now ("normalized" once the assets are sold in CitiHoldings and invested in Citicorp, and they earn 1.2%-1.5%). 

 

Can Citicorp continue to grow it's asset size at a pace matching the reductions in CitiHoldings?  They did it over the past year when Holdings shrunk 34% from a high humber.  Unless they are going to be all run down in 2 years, it will be easier to match the reductions at CitiHoldings with gains at Citicorp.

 

 

 

 

 

 

[ERICOPOLY]

I recognize that people are worried over what's becoming of the net interest margins in the US banks, but does that really affect the margin earned in Latin America and Asia where they make more than 1/2 of their profit?

 

Down to 55% of tangible book value now.  They grew tangible book value by 16% the past 4 quarters.  Will be interesting to see what can be sustained going forward, but buying back shares at this price will go a long way.  So suppose the stock does linger at these levels for quite a while -- they begin returning capital to shareholders next year.  Buybacks at 1/2 of tangible book should boost the growth rate.  I mean, just a 3% buyback can add 3% to the tangible book value per share.  That seems like ample compensation against slower than usual earnings.  Like if they payout 1/2 of their earnings, and they make 12% return on tangible equity, then it's really an 18% growth rate in tangible book per share (or the equivalent of the same thing if you use your dividend to buy more shares).  And those tax losses carried forward make the 12% return increasingly likely.