C - Citibank

[Spekulatius]

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?

 

I‘d say that about 1% of share dilution for stock awards /year is fairly typical, give or take. I think GS was higher when I looked at them (because I owned the stock).

[John Hjorth]

I think Joel here was talking about dilution related to share buybacks above BV. [Well, naturally, Joel can speak for himself.]

[racemize]

I think Joel here was talking about dilution related to share buybacks above BV. [Well, naturally, Joel can speak for himself.]

 

I was trying to figure out how many shares to model the banks issuing each year and then applying the buyback to the new total shares (otherwise, we overestimate the amount being bought each year).  I think 1% is about right, although the banks seem to be pretty aware of their low share price since the GFC and haven't been too terribly high in recent years.

[Viking]

I think Joel here was talking about dilution related to share buybacks above BV. [Well, naturally, Joel can speak for himself.]

 

I was trying to figure out how many shares to model the banks issuing each year and then applying the buyback to the new total shares (otherwise, we overestimate the amount being bought each year).  I think 1% is about right, although the banks seem to be pretty aware of their low share price since the GFC and haven't been too terribly high in recent years.

 

This is something worth monitoring closely moving forward. If memory serves me correctly, I think WFC issues the most stock as part of compensation of all the big banks; I think it may eat 1/3 of all buybacks they do. JPM is likely next. Then BAC. I think Citi currently seems to get the best bang for its buyback buck. However, my guess is now that earnings are growing at all the big banks we are going to get a big jump in stock awards in the coming years so reported buyback amounts will be diluted to a greater degree moving forward.

[Viking]

Citi reported Q1 results today. Here are my key takeaways:

- overall, results came in about as expected - good.

- shares outstanding decreased by 200 million year over year = 7%; impressive

- feel confident they will be approved to return $20 billion in June for 2018 CCAR (and $60 billion over the three year cycle 2017-2019).

- loan growth was 7%, excluding legacy asset sales; legacy assets continues to shrink but is still negatively impacting reported results (impact of 2008 great financial crisis is still being felt).

- macro: synchronized global growth continues

- US tax reform: corporations are in the process of rethinking strategy; expect activity to pick up in 2H of year (as expected, it is taking some time for corporation to act on tax reform).

- libor change this quarter had no impact on their business

- efficiency ratio was 57.9; forecast 57 for year. Will get to low 50 by end of 2020. Driven by top line growth momentum, run down of legacy assets (and expenses) and increase in digital (reducing expenses like needing fewer call centres)

- driven by 3% GSIB and 11.5% CET1 ratio; SLR is fallout from these two levels (do not focus on SLR as it is not their binding constraint)

- in rising rate environment deposit costs are increasing as modelled; corporate betas are moving up more quickly than consumer. Nothing irrational happening.

- cost of credit is stable and continues to perform well; 90 day delinquencies are raising no red flags (no uptick); both consumer and ICG feel good.

- digital continues to grow in importance; how 1/3 of new customers are acquired; important way to transact with existing customers; service digitally is allowing costs to fall (call centres are closed); Asia at forefront of transition to digital, Mexico is behind.

 

Bottom line is the big US banks are performing exceptionally well. Global and US growth is solid. The US consumer is in great shape. Fed is on target to increase rates 3X in 2018.

 

Moving forward, I am going to focus a little more to understand a couple of things:

1.) the digital capabilities of the big Banks as this will likely be a key differentiator moving forward (as it will lower costs significantly for the winners). Who is the best? Is it BOA?

2.) who has the best (stickiest) deposit franchise; consumer is better than corporate. Rates are getting closer to a point where type of deposit franchise will become more important. I think this may also be BOA.

 

CCAR announcements the end of June will likely be the next big event to drive the shares. Like last year, perhaps we get 4 to 5 months of sideways action in share prices before the next move higher. Who knows. Bank shares look cheap to me and I am happy to hold my shares and wait for Mr Market to agree. :-) 

 

[villainx]

Citi reported Q1 results today. Here are my key takeaways:

 

Thanks!

[racemize]

I feel like these are decent results, except you have to add "for Citi" to it.  Listening to the JPM call and looking at their results--just wow.  19% RoTCE vs 11% for Citi...  Citi has the advantage of huge capital returns with lower stock price (although the lower stock price is somewhat warranted, even if it is providing an opportunity).

 

Very curious how BAC's results will compare.

[Spekulatius]

I think BofA has the best online experience from the large banks, Wells Fargo comes last, IMO. I actually like the experience at the branch with Wells Fargo best, but that is becoming less important.

 

When short term interest rates are becoming significant, I think newcomer like Fidelity and Ally become competitive, because Fidelity offers money market rates.

[Viking]

Racemize, I agree. JPM is so well managed it is scary; I listened to their conference call today and they continue to deliver outstanding results. They trade at a premium for a reason.

 

I also listened to the WFC conference call today and they continue to disappoint me; they sound like they are tired and beat on their conference call. Most importantly, 2018 looks like it will be another wasted year for them. I keep wanting to buy the stock but they look like they have so many issues to still deal with that will slow top and bottom line growth; I am going to hold off for now.

 

I am really looking forward to BAC on Monday. They are my largest position (by far). My hope is they continue to get better. I think they are in the process of becoming the second best big US bank (after JPM). I hold them over JPM because they are cheaper and I think they will continue to narrow the valuation gap with JPM. I think Citi is the cheapest but their underlying business is not performing as well as BAC or JPM (Citi is doing ok, just not as good as the other two). WFC is my least favourite of the big 4 US banks given all the issues they are dealing with.

[Viking]

I think BofA has the best online experience from the large banks, Wells Fargo comes last, IMO. I actually like the experience at the branch with Wells Fargo best, but that is becoming less important.

 

Spekulatius, thanks for sharing. Citi has very aggressive plans to drive their efficiency ratio into the low 50% range in the next 30 months and cost savings as mobile grows is a big part of that. My guess is all the big banks are thinking the same thing. This could be a big driver of profitability growth for the banks in the next 18-36 months. Crazy how profitable the big US banks are right now. And there appears more to come.

[John Hjorth]

Reuters [May 7^th 2018]: Valueact takes $1.2 billion stake in Citigroup: letter.

[John Hjorth]

Copied from the topic about Joel's essay about the current state of the Big Four US banks "A few Thoughts on Banks":

 

Citi has shown in an uncanny ability over time to hit any pothole a bank can hit anywhere in the world.

 

To me, it could be a compliment, if it was about golfing [which I'm quite sure it isen't.]. Naturally, here on CoBF it's about banking, and investing in banks [here, particulary C.]

 

My question here is [to all readers]: How do you look at this particular US bank - from an investment [forward looking, at recent price] angle? If you're ditching it as an investment right now, why?

[racemize]

Well, I already wrote about it, but I'll say it another way:

 

I think its history is weak.  I think its recovery has been weak.  I think their current goals are weak/slow.  I imagine it will do the worst of the big 4 in any crisis.

 

That being said, the now-modest goals and timeline should be doable and would result in large returns.  I'm betting on mediocrity, for the most part.  This is also the same reason I'm still in AIG warrants, but that hasn't worked too well for the last couple of years.

[Viking]

John, looking at it strictly from a valuation perspective, C looks very cheap to me (especially compared to the overall market). It currently has a market cap of $175 billion. It will be returning $40 billion to shareholders over the next 8 quiarters which is a staggeringly large number given their current market cap. Shares outstanding will be falling about 8% per year (200 million per year) and it should get close to a 2% dividend yield when CCAR results are announced.

 

However, the bank has more warts than the other large US banks. I do not think they are as well managed as JPM. They have large businesses outside of the US (Mexico and Asia). Their US credit card business has not performed as well as expected. I am not as comfortable with their risk appetite and how they will perform in the next downturn.

 

If the shares stay this cheap and management continues to improve the various businesses I think we will start to get more calls for the company to sell off more assets. Clearly the bank is worth more dead than alive (parts are worth more than the whole). I do not think anything is imminent; however, I would list asset sales as a potential catalyst for the share price for long term holders of the stock.

 

 

 

 

[topofeaturellc]

C’s lack of a deposit franchise is at the root of everything. Not only are they at a funding disadvantage relative to bac/jpm/wfc but it also leads the to be structurally riskier on the asset side to keep spreads up, and that’s before you think about what Sandy did to decimate the already not great credit culture at the bank.

 

Ultimately it is just a materially lower RoE franchise.

 

Take a look at their cards strategy for example. It’s where the growth is and yet embodies all of this.  That said still probably cheap

[Spekulatius]

Citi is half US and half foreign bank. I think they actually lack scale in thr HS, where they aren9nky reperesented in major cities. I don’t know of any particular operation within Citi that is best in class or at least neck to neck with top competitors. The  performance is at best middling and in some cases, they are shown to be the chumps on the table.

 

Ther best franchise may actually be Banamex in Mexico, bt even there, they seem to have lost market share. I do think that Citi would be worth more broken apart.

[topofeaturellc]

Yeah but ex Banamex none of the foreign biz are deposit takers. Maybe some cash management. That's about it.

 

Remember how much Citi sucks and the role Dimon played in that roll-up the next time someone tells you how smart he is.

[villainx]

Remember how much Citi sucks and the role Dimon played in that roll-up the next time someone tells you how smart he is.

 

That seems like a surprising hot take.  Dimon left the same year as the merger.  1998.  Twenty years ago.

[topofeaturellc]

It's not even that spicy. I'll give you the whole take.

 

JPM couldn't participate in the structured fin debacle because it was still injured from the tech wreck.  They were completely in risk off mode for most of the oughts.  Don't forget in '03 you could buy JP at book or so when everyone else was like 2x book.  It was seen as the worst bank on the street.

 

Their success during the gfc was mostly because of what they didn't do, which was mostly luck.

 

Bank One was also a lot of luck.

 

If Jaime doesn't tell Sandy his daughter was incompetent (or maybe other things) he's running C during the GFC

 

In the long run it's probably about as good a business as Wells and BoA.

[Dazel]

 

 

Citi investors are pissed because they did not sell at $8 and it is now $6.80.

The banks have run out of buy back room can’t buy back until after the stress tests as they have exhausted their approved buy backs...Goldman has not bought back any shares this quarter and their stock has been hit hard as well.

 

Look at Apple’s buy back and compare it to Citi’s....Apple’s stock has not only j7mped on the buy back it’s the actual shares being purchased in the open market and it is a monster....Citi is now small in comparison and they are buying back below book value! Financials across the board have their hands tied for now. The entire sector will start to buyback boat loads in July when volumes will slow....what do you think will happen all other things being equal?

 

There is value and then there are catalysts surprised no one is talking about this.

 

Disclosure I bought Citi here it’s still only $6.80...oh yeah I forgot they did a 10 for 1 split.LOL

[HJ]

It's not even that spicy. I'll give you the whole take.

 

JPM couldn't participate in the structured fin debacle because it was still injured from the tech wreck.  They were completely in risk off mode for most of the oughts.  Don't forget in '03 you could buy JP at book or so when everyone else was like 2x book.  It was seen as the worst bank on the street.

 

Their success during the gfc was mostly because of what they didn't do, which was mostly luck.

 

Bank One was also a lot of luck.

 

If Jaime doesn't tell Sandy his daughter was incompetent (or maybe other things) he's running C during the GFC

 

In the long run it's probably about as good a business as Wells and BoA.

 

Interesting take.  Why do you say Bank One was a lot of luck?  I remember reading headlines that Jamie Diamon bought a bunch of stocks when he took the job, but curious what went wrong at Bank One before he got there, and what should he be given credit for in fixing it. 

 

I do think Chase's credit card business is much better than Citi's, BofA's or Wells Fargo's.  Chase credit card seem to have gained mind share among the affluent (Chase Saphire), payment processing (Chase Paymentech seem to do interesting things), while generating good returns.

 

I also think that to the extent the Bank One / Chase merger can be considered a success, he should be given credit for, since it's not a merger that would have happened without him.  Chase was looking for a successor CEO.

 

London whale was stupid.  Every one of these banks have issues, and managing these issues or managing the bank to avoid these issues before they come up is a difficult task, while you have to compete with the least common denominator for business every day.  But Jamie Dimon is probably the CEO that inspires the most confidence compared with all the other big bank CEO's. 

[villainx]

Also the Bank One / Chase merger happened in 04, after the internet bubble fallout, I presume.  I'd never dispute luck playing a huge role in anyone's success but Bank One and then Chase were fallen banks when Dimon got on board and they both worked out.  It seemed Dimon was patient when he had to be and aggressive when the time was right.  And overall, he seemed to be his own person - with some evolution - after leaving Weill and Citi. 

 

That said, I appreciate the pushback against anointing Dimon as HOF CEO, contrarian takes always positive!  Dimon had good timing with a lot of his career moves.

[Viking]

I do not have the history; thanks for sharing the various perspectives.

 

I have been following all the big US banks pretty closely for the past 3-4 or so years. I think a lot can be learned about each of the CEO’s (and other key people) by listening to the conference calls and investor presentations. Do they have a plan? How well do they execute the plan? Do they do what they say they are going to do? Are the honest? Are they trustworthy?

 

I have been most impressed by Dimon at JPM. Moynihan, at BAC, is not the most eloquent speaker; however, he has done a solid job of communicating and executing on the banks priorities and we are coming to understand what the new BAC looks like and what it is capable of (it looks very well positioned moving forward). Corbat at C has done a decent job in a very difficult situation; however, I am not as confident in their future strategy and prospects. Sloan at WFC has performed the worst of all the big US bank CEO’s over the past year; listening to him on the conference calls is a little like listening to someone scratching their nails on a chalk board (i am really struggling to understand if WFC is still a top tier bank...).

[CorpRaider]

Dimon comes off like a champ in everything I've ever read, including (most importantly to me) his letters and Sorkin's "Too Big Too Fail", but I'm grateful for a critical view. 

[fareastwarriors]

I tried to open checking and saving accounts online yesterday. I finished the app and received an app ID. I did not receive an email confirmation despite completing and submitting the application. I called their customer service line just earlier to see what's the hold up. They have no record of my application.

 

The rep told me to try the online application again and call back in a hour to see if it's pending in their system...

 

 

Epic fail on simple checking/saving accounts. Come on now...