C - Citibank

[John Hjorth]

Wow! Much capital return at C is much larger than hoped for:

 

"The planned capital actions include an increase of Citi’s quarterly common stock dividend to $0.32 per share (subject to quarterly approval by Citi’s Board of Directors), as well as a common stock repurchase program of up to $15.6 billion during the four quarters starting in the third quarter of 2017. These planned capital actions total $18.9 billion over the next four quarters."

 

https://finance.yahoo.com/news/citi-announces-2017-planned-capital-203800096.html

 

Simply put, just friggin' awesome!

 

- Thank you soo much for sharing your line of thinking here on CoBF, Viking. You have made my day.

[racemize]

solid results across the board.  9% buyback, 2% yield. 

[Viking]

John, one of the big challenges with investing is timing... especially when dealing with the government. The C 'story' is pretty straight forward. However, the timing  of when the various pieces will happen (and benefit shareholders) is impossible to predict. We are lucky to have such a large amount approved for return to shareholders this year. :-)

 

There are many great 'layers' to the approval today for C:

1.) dividend of $0.32 (2% yield) is finally large enough to appeal to income investors. Income investors also know that dividend will be increasing materially each of the next few years. At $0.32 The payout ratio is only about 24% and C will move this to 30% in the coming years. This opens C up to a whole new group of potential investors.

2.) share buybacks = $15.6 billion will allow C to repurchase 8.5% of outstanding shares. My guess is the purchases will be front end loaded (like last year) so we could see 1% of shares outstanding repurchased each month for the rest of 2017 starting in July.

3.) C management credibility: management has stated they need to do a number of things to unlock excess capital and return it to shareholders; I think this is only the start of C returning excess capital to shareholders

4.) ROTCE target: during their upcoming investor day C will now be updating the path to get to more acceptable industry return ratios.

5.) consumer bank: C management is also telegraphing that returns will be improving in 2H '17 in its consumer business (via investments made in credit cards the past two years); this sets the table for solid top and bottom line growth.

6.) size of CCAR awards may indicate regulators under a Trump presidency are going to ease interpretation of regulations in bank friendly way. More good news likely to come over the next year.

7.) next year there is a good chance we could see a larger CCAR award as C grows total earnings and continues to return excess capital.

 

I have said this many times... I do not think most investors understand the number and size of tailwinds that are behind the big US banks today. They are going to be the gift that keeps on giving the next couple of years :-)

 

[racemize]

I have said this many times... I do not think most investors understand the number and size of tailwinds that are behind the big US banks today. They are going to be the gift that keeps on giving the next couple of years :-)

 

We need it, after suffering through the slowness of the last few years.  Glad to have the wind at our backs finally.

[John Hjorth]

Why your Gusy think C has better potential than BAC or WFC? During last days BAC and WFC were at the top of the big banks, concerning price-increase.

 

My main reason to be in BAC and WFC is that BRK is behind it. And they were extremly cheap in past.

 

I'm sorry for the late reply here, Valuehalla.

 

I'm positioned exactly like you, I think, with regard to BAC and WFC.

 

Being invested in C is to me right now another  case.

 

If you want some kind of elaboration, please just post.

[John Hjorth]

John, one of the big challenges with investing is timing... especially when dealing with the government. The C 'story' is pretty straight forward. However, the timing  of when the various pieces will happen (and benefit shareholders) is impossible to predict. We are lucky to have such a large amount approved for return to shareholders this year. :-)

 

There are many great 'layers' to the approval today for C:

1.) dividend of $0.32 (2% yield) is finally large enough to appeal to income investors. Income investors also know that dividend will be increasing materially each of the next few years. At $0.32 The payout ratio is only about 24% and C will move this to 30% in the coming years. This opens C up to a whole new group of potential investors.

2.) share buybacks = $15.6 billion will allow C to repurchase 8.5% of outstanding shares. My guess is the purchases will be front end loaded (like last year) so we could see 1% of shares outstanding repurchased each month for the rest of 2017 starting in July.

3.) C management credibility: management has stated they need to do a number of things to unlock excess capital and return it to shareholders; I think this is only the start of C returning excess capital to shareholders

4.) ROTCE target: during their upcoming investor day C will now be updating the path to get to more acceptable industry return ratios.

5.) consumer bank: C management is also telegraphing that returns will be improving in 2H '17 in its consumer business (via investments made in credit cards the past two years); this sets the table for solid top and bottom line growth.

6.) size of CCAR awards may indicate regulators under a Trump presidency are going to ease interpretation of regulations in bank friendly way. More good news likely to come over the next year.

7.) next year there is a good chance we could see a larger CCAR award as C grows total earnings and continues to return excess capital.

 

I have said this many times... I do not think most investors understand the number and size of tailwinds that are behind the big US banks today. They are going to be the gift that keeps on giving the next couple of years :-)

 

Let's see how this play out going forward, Viking. : - )

 

We can be geniuses, or idiots - in totally clear hindsight, afterwards.

[Valuehalla]

Well done Viking! Thx for sharing your knowledge and opinion here  :)

[John Hjorth]

I still think

emulates fairly well C management in talk with Fed and regulators in the spring of '09.

[fareastwarriors]

https://www.bloomberg.com/gadfly/articles/2017-07-14/citi-s-risk-taking-ways-should-give-investors-pause

[John Hjorth]

SA: IP Banking Research: Citigroup Post CCAR Is a Lean, Mean, Buyback Machine.

[Viking]

Investor day is today and presentations are up on the C web site. Company is forecasting 15-20% earnings per share growth out to 2020. Stock is like a coiled spring... crazy the number of meaningful tailwinds they have right now. The rub is it will take a couple of years to play out.

 

http://www.citigroup.com/citi/investor/investor-day/2017/

[John Hjorth]

Investor day is today and presentations are up on the C web site. Company is forecasting 15-20% earnings per share growth out to 2020. Stock is like a coiled spring... crazy the number of meaningful tailwinds they have right now. The rub is it will take a couple of years to play out.

 

http://www.citigroup.com/citi/investor/investor-day/2017/

 

Thank you for sharing, Viking,

 

I must admit, that I have an urge to buy more right now, [due to currency related matters, still a bit into the red because of that - doesn't matter]. The investment case is to me still just so compelling, and hasen't changed one bit on the investor day presentation. C seems to be on track.

[Viking]

John, I continue to like C. It is a very hard company to value properly when using standard metrics; I think it is cheaper than it looks. My plan with C is to just hold and monitor and not give in to the temptation to realize some nice gains (and hope for a lower re-entry point).

 

1.) The regulatory earnings (what they can return to shareholders) is much higher than reported earnings dues to the DTA and this will continue for at least the next 10 years. C estimates DTA utilization will be $2 or 3 billion each year.

2.) they arex way over capitalized (C estimates by about $18 billion) and it appears regulators will allow C to return this amount to shareholders in the next couple of years. We may see $4 to $5 billion in excess capital return in each of the next 3 or 4 years (not including DTA or regular earnings).

3.) as seen this year C will be allowed to return 100% of earnings to shareholders each year moving forward.

 

DTA plus 'over capitalized' plus regular earnings = $20-$22 billion in capital return each year for the next 4 or 5 years. How do you value a company that has a +10% payout yield (dividend plus stock buyback) over multiple years that is still growing total earnings?

 

How well management executes will determine top line growth. Management is very confident the consumer business will improve starting 2H 2017. This should grow total earnings by about $1 billion in each of the next 4 or 5 years.

 

Fed tightening is one wild card. A quarter point increase in Dec and one increase each year baked in to C estimates. Should the Fed tighten more this will be incremental upside for C. I think the Fed will tighten in Dec and more than once in 2018. Gundlach of Doubline is of the opinion that US 10 year treasuries will increase in yield later this year; if this happens the bank stocks will do well.

 

Another wild card is should Trump actually implement policy that results in higher US GDP growth this will also be upside for C. I think Trump will be able to get some pro-growth initiatives implemented in the next 12 months.

 

A third wild card is regulatory reform for the banking industry. I think existing rules will be re-interpreted in a more pro-bank way and this will improve bank profitability. I also think some legislation will get passed in the next 12 months that will also be favourable to banks.

 

When I weave it all together I like the risk reward for C right now. I think it will return 15-20% in each of the next 3 or 4 years from where it is trading today ($67.00). If the wild cards work out then it could return +20% each of the next 3 or 4 years.  Solid potential return for a stodgy bank stock that is staring everyone in the face.

 

The key risk, as I have said before, is the US and global economies and they continue to chug along.

 

Importantly, the news from C over the past couple of months has been very good:

1.) CCAR award was a big win - capital return was much larger than expected by analyst community and investors

2.) Q2 earnings were good so a small win

3.) investor day was a big win - they mapped out a very reasonable plan to improve returns for investors over the next 3 or 4 years

[John Hjorth]

Viking,

 

I apologize for my silence in this topic since your last post. [ : - ) ]. I appreciate very much, that you have taken the time to share your thoughts here on CoBF about C.

 

Yes, I still agree with you on the thesis - on all points. [ : - ) ] This is about being patient to see the thesis to play out. So far, not much has changed, for better or worse, ref. the thesis.

 

I have one question though, that pops up in my mind from time to time. IP Banking Research on SA has been silent for long now, while he/she was very active up to the announcements of the CCAR results for the four major US banks. What do you think about that? - I ask because I haven't been following IP Banking Research as long as you have.

 

Do you think that he/she is just sitting under the apple/peach tree, waiting for the money rain to start? [like I do, - somehow [ : - ) ]<- that may be subject to change, though : - ) ].

[Viking]

John, nice to hear from you again :-)  Regarding IP Banking research, yes, s/he has not posted anything for a while on the banks on Seeking Alpha. This does not concern me at all; IP did not post much late last year and to start this year (if memory serves correct).

 

There are two events I will be listening to next week:

1.) Monday: Citi CFO will be talking at conference

2.) Tuesday: Gundlach (Doubleline) will be presenting outlook

 

The next month will be interesting. I am not convinced that 10 year US treasury yields at 2.05% makes any sense; growth continues to be ok. The weakening of the US dollar has picked up speed.

 

I am watching the US and global economies. As long as growth continues to chug along I am happy holding my big bank shares (mostly C and a little BAC). If shares sell off this will help their massive share buybacks (able to retire more shares at lower prices). When C reports Q3 earnings in August my guess is they will have bought back 2 to 2.5% of all outstanding shares during the quarter; this will be the gift that keeps on giving. Buffett has said many times that time is the friend of the wonderful business. I am going to try and be patient with the big banks and let time work its magic.

[StevieV]

C is the last of the big banks I own.  I used to own BAC and WFC as well.

 

I am not sure I would call them a "wonderful" business, but am happy to continue to hold C here.  The buyback provides a nice tailwind.  8% or so of shares retired per year.  Plus a 2% dividend.  They don't need to do a ton right to support a reasonable return.  If they can grow some, watch costs, the yield curve improves, valuation improves, etc., then you can get some bigger returns.

 

Still a nice risk/reward here in my opinion.

[John Hjorth]

C is the last of the big banks I own.  I used to own BAC and WFC as well.

 

I am not sure I would call them a "wonderful" business, but am happy to continue to hold C here.  The buyback provides a nice tailwind.  8% or so of shares retired per year.  Plus a 2% dividend.  They don't need to do a ton right to support a reasonable return.  If they can grow some, watch costs, the yield curve improves, valuation improves, etc., then you can get some bigger returns.

 

Still a nice risk/reward here in my opinion.

 

Yes, somehow it is mind boggling to think about that this bank has now spent almost a decade to get its stuff just roughly right. I think one can actually talk about "the lost decade" in the history of the bank. It still has a lot to do to get in a better operational shape, compared to its three peers. JPM, WFC & BAC are way ahead on that account, and also therefore more expensive at this point in time.

 

The thesis for my part is to look at the financials of the bank through a lens, where you back out all the accounting spin about the DTAs in both the balance sheet and the income statement to get to "real" performance metrics, combined with the fairly large buyback program in place and running, while the bank is still out of favor, buying back shares now below book value.

 

- - - o 0 o - - -

 

Viking mentioned in his last post in this topic that the City CFO John Gerspach would participate in the Barclays 2017 Financials Conference on September 11, where he was interviewed by Barclays analyst Jason Goldberg. The transcript can be found here.

 

There is a lot of interesting stuff to read in that transcript, in my opinion. Both about the buyback program and the operational state of the bank. After reading the transcript I've got the feeling that Mr. Gerspach appears to be reasonably candid and sincere about the operational situation of the bank.

[LC]

Good interview, thanks for posting John. Citi is a strongly consumer driven business.

[UK]

Citi is a strongly consumer driven business.

 

Not sure about this:

https://www.bloomberg.com/gadfly/articles/2016-08-08/citigroup-stockpiles-weapons-of-mass-destruction

https://www.bloomberg.com/graphics/2016-global-banks/

[LC]

That's true they have drastically shrunk their retail presence globally. I do think their consumer business is more sensitive. We're slowly coming out of a super low interest rate environment, consumer credit could be slowing down going forward. That's the risk I see - but there are also implications for ICG as well

[John Hjorth]

Thank you, UK, for the push back,

 

ref. last post from LC,

 

there are certainly operational issues with C - that's why it's cheap, compared to peers.

[Viking]

John, thanks for posting the link of the transcript. It provides an excellent summery of where Citi is at. It really is amazing how long it takes a big company like Citi to pivot its business. Coming out of the Great Recession they were in survival mode. The company only in 2013-14 started to get its head above water. The last three years has been transformation. And I t will be a couple more years before legacy assets have been run off (1% drag per year).

 

With hindsight, you really appreciate how far ahead of the other big banks that JPM was coming out of the Great Recession and for years afterwards (right up until 2016). However, I do think that Citi and BAC are improving their businesses so the gap with JPM is shrinking. I expect this to continue the next few years. (And Citi and BAC are years ahead of the big European banks...).

 

In terms of the current operating environment I like the discussion around momentum in their various businesses. This is what I will be monitoring moving forward.

 

I will also be watching the regulators and any announcements in the next 6 weeks regarding changes to CCAR etc.

 

Overall, lots to like with C right now (and the other big US banks).

[John Hjorth]

Thanks, Viking,

 

I'm actually sitting more or less glued to my monitors right now, with the TV set to CNN, to read and hear what Ms. Yellen has on her mind, in my local time, here tonight.

[ : - ) ]

[Viking]

John, just watching the Fed release live. The Fed remains quote hawkish which the market was not prepared for. Looks like interest rates are headed higher and this is very good news for the US banks (which are moving higher). I also shifted a little of my C into BAC (for my bank holdings I am now 66% C and 33% BAC). If rates move higher I expect BAC to outperform.

[Viking]

Gundlach feels the ECB is a key to interest rates moving forward. He thinks the ECB is holding down German yields and this is holding down US yields. If the ECB shifts to more hawkish stance and German yields start to rise And this would push up US yields. Let's hope the European economy continues to improve. :-)