C - Citibank

[Viking]

John, thanks for taking the time to dig through everything and post your numbers. The DTA almost makes C like two companies together; to really understand you have to first peel them apart and understand each piece separately. I am really looking forward to hearing from all the big US banks; so much stuff to get updates on and to learn about in the coming days :-)

[John Hjorth]

John, thanks for taking the time to dig through everything and post your numbers. The DTA almost makes C like two companies together; to really understand you have to first peel them apart and understand each piece separately. I am really looking forward to hearing from all the big US banks; so much stuff to get updates on and to learn about in the coming days :-)

 

This is actually a very good way the phrase the excersise, Viking. [ : - ) ]

 

Wow, C just took a hit half an hour ago on the DTAs of USD 19 B and USD 3 B on the shift from global to territorial US tax system! I need to shift unit on my loss converter, from tonnes of [spilled] milk, to cost prices of Great Belt bridges!

 

The market reaction on this accounting spin when market opens within the next hour is also "interesting"!

[ourkid8]

Care to elaborate?

 

The market reaction on this accounting spin when market opens within the next hour is also "interesting"!

[John Hjorth]

It's explained in my post #548, ourkid, especially:

 

... It is all about principle for income & expense accounting - accrual accounting or accounting based realized tax savings from the DTAs - for C. ...

[John Hjorth]

WSJ : Citigroup Earnings Wiped Out by Tax Charge. [subscription protected].

 

The article in full can be read through this tweet.

[ourkid8]

Anyone here still holding C?  The only thing holding me back from selling out is the huge share repurchase program in place however it is now selling for a premium to book. 

[John Hjorth]

I am. And my intention is to buy more. I just need to see the dust somewhat settle for the USD / EUR pair. There must be a bottom somewhere on that short term.

[ourkid8]

Why? C is currently not earning their cost of capital however they are selling for a premium to book, is there something I am missing?  I have a large position however I am definitely not looking to add to it. 

 

I am. And my intention is to buy more.

[John Hjorth]

In a non adverse scenario going forward with regard to macro conditions EPS will grow nicely because of the buyback program in progress, expected to increase, despite only moderate growth expectations for the bank as such.

 

The big four US banks are gradually morphing into being - at least to some degree - compounders.

 

Viking has actually posted about it in detail a few days ago in the BAC topic. The risk here is if the macro conditions start deteriorate in the US.

 

Edit:

 

Link to Viking's post.

[Spekulatius]

In a non adverse scenario going forward with regard to macro conditions EPS will grow nicely because of the buyback program in progress, expected to increase, despite only moderate growth expectations for the bank as such.

 

The big four US banks are gradually morphing into being - at least to some degree - compounders.

 

Viking has actually posted about it in detail a few days ago in the BAC topic. The risk here is if the macro conditions start deteriorate in the US.

 

Edit:

 

Link to Viking's post.

 

The next recession will prove otherwise. Citibank has a storied history to be leader in getting knee deep into any junk anywhere in the world.

[John Hjorth]

The next recession will prove otherwise. Citibank has a storied history to be leader in getting knee deep into any junk anywhere in the world.

 

Yes. And I'm out of this stock the moment I see things start to break in the US economy.

[Spekulatius]

The next recession will prove otherwise. Citibank has a storied history to be leader in getting knee deep into any junk anywhere in the world.

 

Yes. And I'm out of this stock the moment I see things start to break in the US economy.

 

What issues do you see with the US economy? Seems pretty peachy to me right now. we probably going to have a recession two years down the road, when the recovery goes into its 10 years, which historically speaking is almost unheard of.

[John Hjorth]

What issues do you see with the US economy? Seems pretty peachy to me right now. we probably going to have a recession two years down the road, when the recovery goes into its 10 years, which historically speaking is almost unheard of.

 

That's a good way to phrase the perception of the status quo and the overall outlook, Spekulatius. I share this perception with you. My major concern right now with the US is actually the relation between US Politics and US economy. Personally I consider US politics unpredictable right now. [i'm not trying to stir the pot in a topic in the Investments Ideas forum here on CoBF, just posting my personal perception here.]

 

There is to me no doubt that the losses and provisions on the loan books where we are now in this cycle for these banks are artificially low, ref. what you have posted here on CoBF before. This will not continue long term, I think.

 

I can't find anything else anywhere [that I want to own], that offers me a forward P/E in the lower half of the teens with a fairly large share buyback program running, that to some extent is quality [varying extent for the big four US banks] and has similar prospects within the next 1 - 2 years.

 

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I may be totally wrong here. The loss, however,  will not get a chance to escalate. That's also the reason why I want to do this in tax deferred accounts, so if I screw up here, I'll at least have the opportunity immediately for tax deduction at year end, because of yearly taxation of returns, based on MtM valuation taxation of both realised and unrealised gains [called PAL-tax here, 15.3 percent].

[Spekulatius]

What issues do you see with the US economy? Seems pretty peachy to me right now. we probably going to have a recession two years down the road, when the recovery goes into its 10 years, which historically speaking is almost unheard of.

 

That's a good way to phrase the perception of the status quo and the overall outlook, Spekulatius. I share this perception with you. My major concern right now with the US is actually the relation between US Politics and US economy. Personally I consider US politics unpredictable right now. [i'm not trying to stir the pot in a topic in the Investments Ideas forum here on CoBF, just posting my personal perception here.]

 

There is to me no doubt that the losses and provisions on the loan books where we are now in this cycle for these banks are artificially low, ref. what you have posted here on CoBF before. This will not continue long term, I think.

 

I can't find anything else anywhere [that I want to own], that offers me a forward P/E in the lower half of the teens with a fairly large share buyback program running, that to some extent is quality [varying extent for the big four US banks] and has similar prospects within the next 1 - 2 years.

 

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I may be totally wrong here. The loss, however,  will not get a chance to escalate. That's also the reason why I want to do this in tax deferred accounts, so if I screw up here, I'll at least have the opportunity immediately for tax deduction at year end, because of yearly taxation of returns, based on MtM valuation taxation of both realised and unrealised gains [called PAL-tax here, 15.3 percent].

 

I do not share your sentiment. While I consider Trump incompetent, I don’t think it matters for the economy. So far, he seems to have gotten some tax cuts through (which in high tax states are really not that large for better earners, due to offsets), which are a modest positive, but he hasn’t done and is unlikely to do much else. Presidents doing absolutely nothing traditionally have been good for stocks, especially if things are moving along by themselves.

[John Hjorth]

Thanks for sharing your view on things, Spekulatius. I'm not sure what to think, actually. To me it's concerning that Mr. Trump is labeled pro business and at the same time seems unable to get along with US business leaders. Personally, I hope for that infrastructure spending bill. That will be a positive for these banks, too.

[Viking]

Citi shares are currently trading about $80. The company has a market cap of $206 billion (according to Yahoo Finance). They will be returning a minimum of $60 billion to shareholders in 2017, 2018 and 2019 CCAR Years (July to June). This provides shareholders with about a 10% yield for many years (which is actually quite hard to comprehend). They continue to fix their businesses. They will grow top line revenue in line with GDP growth. Profits will also be growing nicely. Looks cheap with lots of upside.

 

Reminds me of the story of the person who finds a $20 bill lying on the ground and refuses to believe it, thinking, if it was really a $20 bill someone would have already picked it up. Think independently, be logical, act on your conclusions, don’t get trapped in dogma.

[John Hjorth]

OK, Viking,

 

Tomorrow it is. [Deja vu related to my C situation pre C CCAR June 2017! [ : - ) ]]

 

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Called my broker Thursday. No help to get our Berkshire shares in tax deferred accounts out to taxable accounts and cash the other way. "We don't have any trading portfolio, and you can't have sell and buy orders in the market at the same time." So, welcome to the daily volatility and the spread!

 

So, tomorrow, I expect [please read: hope!] finally to smoke my favorite day trader, Swedish IT4ever! [Please see attached - I mean: He seems to be asleep the whole day at the moment, while I'm not! ]

 

The only sure winner here is the broker ...

 

[basket approach on all the Big Four US banks.]

Nordnet_Bank_Shareville_board_-_IT4ever_performance_-_20170129.docx

[Viking]

John, in terms of buying shares today, one key is how long one plans to hold the shares. In the next week, month or couple of months I really have no idea where the bank shares go (up or down). They have had a great run the past 5 months or so and obviously nothing goes straight up indefinitely. However, looking out 12 months my guess is ‘the story’ will be better, earnings will be higher and shares also will be higher. So I have decided to hold my bank shares and not try and get to cute and time things.

 

My past experience is I will sell a winner to lock in some gains and hoping to buy back in at a lower price. Instead sometimes the stock keeps powering higher and I then do not buy back (as I will not pay the higher price). I am trying to be a little more patient with my best picks - especially if they are going up and the story keeps getting better, which is the case with the big US banks.

[racemize]

I've been working on figuring out dilution of the big banks, and found it to be a little harder than I thought.  I've used the following approach to get a rough idea for C:

 

buyback for 2016: 0.196

Change in shares for 2016 and 2015: 0.177411

Difference (= dilution): 0.018589

Dilution %: 0.67%

 

Anyone done this exercise or point out any issues?

[Viking]

C did a 30 minute Q&A at the RBC conference today: http://www.citigroup.com/citi/investor/

 

My key takeaway is I think their business is doing ok. However, I think they will struggle to grow their overall business and total profitability. Cards has been presented for a couple of years now as a growth engine and it has not materialized as promised. This is disappointing. Solid bank. But other than capital return and cheap valuation I am not sure what to be excited about.

 

BAC and JPM look like they are doing a much better job of growing their top line and total profitability. Capital return will also be solid. They are a little more expensive than C. BAC is my largest position and I own some C but I am a little more concerned C’s growth will continue to lag peers for the next couple of years. Munger’s lesson to Buffett was pay up for quality. BAC and JPM look to be better quality and the current premium in price for BAC especially (to C) looks quite small.

 

Here are my notes:

- tax rate will be 24-25%, down from 33%; this will improve ROE by 200 basis points by 2020

- new ROTCE target for 2020 = 13% (given tax reform windfall), up from 10.5%

- efficiency ratio improved 150 basis points last year; expect 100 basis point improvement this year (driven by 2% revenue growth and flat expenses)

- CCAR: scenario this year is a little tougher than they expected; still confident they will deliver $40 billion to shareholders in next 2 CCAR cycles ($60 billion over three, including current year).

- dividend yield targeted at 2-2.5% (Fed has a 30% soft cap)

- Fed has no cap on total capital return

- cards: expect revenue headwinds this year (similar to how they finished last year); this will delay growth in book by one year. Underlying book is ok.

 

 

 

[racemize]

Thanks Viking.  I'm surprised their targets are only 13%--I had gotten a higher impression from the last conference call.

 

If we ignore capital return, that ROTE implies something like $7.85 (substituting TBVPS, so $60.40*13%).  If market puts a 13 multiple, that's around $100, which is a return of ~11.22% annual to the end of 2020 (a lot higher if they get to that sooner).

 

However, if they return 100% capital with a ramp up of 10% ROTE, 11.5% ROTE, and 13% ROTE over 2018, 2019, and 2020, returning all capital at a 13 multiple, then the EPS increases to ~$9.  Using the same 13 multiple, that around $117 per share, which is a ~18% annual return (also a lot higher if they get to that sooner).

 

I believe those range of outcomes are a little better than the ones assumed for JPM and BAC (I also own all three of these, I believe BAC and JPM are better, but C is a slightly larger position based on cheapness).

 

Please chime in with any corrections, particularly if I messed up the math.

[John Hjorth]

I am still with you here, gents! [: - ) ]

 

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Somehow, the market seem to share your view here, Viking.

 

Market price development since last CCAR Announcements at 28^th June 2017:

 

BAC: +34.54%

JPM: +29.50%

C: +13.63%

WFC: + 4.39% [<- here, I suppose, we all know why]

 

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To me, it's about time to give these a spin once again. I'll update the DTA adjusted numbers for C in this topic as soon as I see the pdf-file of the annual report for C. Does anybody have any idea why it is not up on the C website yet?

 

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[i have been burried in year end work, consolidation, 2017 tax returns & the final work on the MIL estate - set to go out from here on 15[sup]th[/sup] this month to the probate court and the Danish IRS.

 

Furthermore, I have now been stuck now for more than 3 months with "locked in" material amounts of cash - please just call it "cash in transit", that I can't lay my hands on, because of "transfer in progress" of tax deferred funds from a Danish bank to a Danish branch of a Swedish bank. - It's just so cumbersome & time consuming, and it takes an eternity!]

[John Hjorth]

Citigroup 2017 Full Annual Report & 2018 Proxy out today.

 

I had to switch to incognito browsing to get it.

 

I'll update my file with DTA-adjusted numbers in due course and post it here.

[Spekulatius]

C is trading now at 1.2x book value (~$60/share) so the revaluation story has played out -future gains need to come from higher ROA.

[John Hjorth]

C is trading now at 1.2x book value (~$60/share) so the revaluation story has played out -future gains need to come from higher ROA.

Thanks Viking.  I'm surprised their targets are only 13%--I had gotten a higher impression from the last conference call.

 

If we ignore capital return, that ROTE implies something like $7.85 (substituting TBVPS, so $60.40*13%).  If market puts a 13 multiple, that's around $100, which is a return of ~11.22% annual to the end of 2020 (a lot higher if they get to that sooner).

 

However, if they return 100% capital with a ramp up of 10% ROTE, 11.5% ROTE, and 13% ROTE over 2018, 2019, and 2020, returning all capital at a 13 multiple, then the EPS increases to ~$9.  Using the same 13 multiple, that around $117 per share, which is a ~18% annual return (also a lot higher if they get to that sooner).

 

I believe those range of outcomes are a little better than the ones assumed for JPM and BAC (I also own all three of these, I believe BAC and JPM are better, but C is a slightly larger position based on cheapness).

 

Please chime in with any corrections, particularly if I messed up the math.

I've been working on figuring out dilution of the big banks, and found it to be a little harder than I thought.  I've used the following approach to get a rough idea for C:

 

buyback for 2016: 0.196

Change in shares for 2016 and 2015: 0.177411

Difference (= dilution): 0.018589

Dilution %: 0.67%

 

Anyone done this exercise or point out any issues?

 

Spekulatius,

 

With all due respect: No. To me, these large US banks have last year - at the last CCAR Announcement, in late June 2017 - turned into compounders and cannibals. To me, BV matters less than earnings here, going forward. Furthermore, to me, the perspective, from an investment angle, has to be per share - for both [both BV and earnings]. - All risk considerations excluded here, as a basis for discussion, so things don't get too bloated, from a perspective of discussion, and analysis. The aforementioned has not to be understood as P/B doesn't matter, when fairly large buyback programs for these banks are in place and in progress.  Naturally P/B do in this situation for the buybacks.

 

Furthermore, one have to take into consideration, that the release of surplus capital to run the buyback programs in place and running now, involve active balance sheet management at these banks. [rb has posted about it in the WFC topic]. Especially C has disclosed, that it does a lot of active balance sheet management - alone because of it's tax situation [with large DTAs]. It's all described in the 2016 financials for C.

 

So, alone for that reason, the ROA & ROE will go up going forward, when the bank posses surplus capital, according to regulators.

 

Joel [racemize],

 

I think about this exactly like you do, ref. your last two posts quoted above. [i'm sorry for the late response here.] The understanding of the dynamic interaction going forward between P/E, EPS, PB under the buybacks going on, dilution, ROTE & ROE is to me important here, if one is not in this game for a guite short term gain. [Here, short term understood as perhaps just months .]

 

When I think about it, I end up thinking in differential- & intregral calculus, which I simply don't master any longer, because of lack of maintenance, because of lack of practice for a long time now [Auditors only add, subtract, multiply & divide, unfortumately - plus do approximated statistical sampling - that's about it.]

 

When one recognize, that one is mentally impaired [me here [lol]], one have to grab for help supplies / aids, which here must be Excel, for an appoximated solution. [it must end up as a worksheet with circular references, that has to converge to an equilibrium, after a lot of [a priori set] recalculations ].

 

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However, it may take some time - I'll do it because:

 

1. It's a good mental excersise,

2. I seldom give up and quit on anything, that I'm hell bent to understand. [Which I am here.]