C - Citibank

[John Hjorth]

Let's hope they front load the buyback(as they have done in the past) especially as the stock is selling below book!!!

 

At the end of Q1 Citi had 2.550 billion shares outstanding. Shares are currently trading at $68. A stock repurchase program of $17.6 billion will allow C to buy back 259 million shares = 10% of shares outstanding.

 

Dividend of 2.5% + share repurchase of 10% = 12.5% capital return to investors. Simply amazing in today’s environment. Where can you get a 12.5% guaranteed rate of return on your money? And the C franchise will be in a stronger position in 12 months.

 

Yes, C will not be growing top line as much as JPM or BAC; however, they will see some top line growth and when you combine this with the lower expenses (mentioned by ourkids as improving efficiency ratio) and you get a business that will grow total profitability. The big US banks are the gift that keeps on giving.

 

Not to long ago C had more than 3 billion shares outstanding. In 8 more quarters (not that far away) they will have a little over 2 billion outstanding. They will have reduced their shares outstanding by about 30% in a few short years. During this same timeframe they invested and improved their operations. Patient investors have been well rewarded; and we are still early in this game.

 

Picture this:

 

Right now, I'm in an amusement park. A year ago, I bought an eternal use card for a certain attraction called "The Unknown Roller Coaster", and jumped into the wagon. It turned out that one tour takes one year, ending Friday last week at market closing. I went home for weekend, and now I'm ready for the next tour, sitting in the wagon again, very early - the next tour starts at 15:30 today my local time, and - most important of all - this time, I'm dressed properly:

 

1. Helmet

2. Proper eye protection glasses

3. Full skydiving suit

4. Parachute.

 

Another guy enters as an early bird, and takes a seat next to me, appearing a bit puzzled about my "costume", and looking up at the visible part of the whole amusement installation.

 

Loong pause...

 

He: "Do you expect a rough tour?", again looking at the visible part of the installation and my "costume". Me [very evasive]:  " I hope it'll mostly just be a cosy tour around in the park ."

 

- - - o 0 o - - -

 

With regard to C front loading the buybacks, I come to think of this:

 

.

[Viking]

John, I really like your comparison of the stock market and an amusement park; lots of parallels.

 

I just finished re-reading Peter Lynch’s book One Up On Wall Street. One of my all time favourite investment books. Every time I read it I take away a couple of different lessons. A couple of takeaways this time:

1.) it often took him 3-4 years of holding a stock to see his best gains (it took that long for the story to play out and Mr Market to get excited and want to get on the ride)

2.) unless it changes ‘the story’ you have built for holding a stock, ignore the news flow, especially the talking heads

3.) growing profits are key

4.) don’t sell just because a stock has gone up in price. If ‘the story’ is getting better continue to hold the shares; this is how you can get your big winners (the multi baggers)

[John Hjorth]

Viking,

 

Thank you for reading and approaching my post exactly as it was meant. [ ; - ) ] - Somehow, I suppose I woulden't today post something like I did, if I was below ["Square One" [give or take a bit], plus some dividends received], which is actually where I am with C right now, after now one year.

 

I still remember some time back, when some stuff went bad for some very skilled fellow board members with regard to CBI. [i do not know that particular initial investment case back then in detail.] I just remember that one board member [You have to look it up your self to find out who - I won't post it here] exited the CBI position, based on the ongoing discussion here on CoBF, calling the ongoing discussion "thesis drift", after the bad thing happened. [i suppose "thesis drift" needs no explanation here - at least to me, it seems self-explanatory, as a mental state, based on confirmation bias.]

 

- - - o 0 o - - -

 

-Where are we with C, right now? [Major points only here]:

 

1. Your thesis from spring 2017 posted here on CoBF has overall, and in general, played out very, very well. We can put quite some checkmarks left to the bullets of your original thesis.

2. Newcomer to the discussion - gradually along the way - about the Big Four US banks seem  - at least to me - to some extent to be inceasing operating leverage [based on the banks' investment in their own franchises, to get more efficient].

3. The US economy seem to continue to go ahead, despite a lot of noise, ups and downs & potential headwinds.

4. The only thing I can't see happening or being near right now is the US infrastructure reform. And right now, I'm not even sure that's a bad thing. [in all your posts about your original thesis, you had a qualification about that you had no idea about when what would happen.]

 

- - - o 0 o - - -

 

So, no thesis drift here, for my part. To me, the thesis hasen't been stronger as right now, since I got involved. I think my only mistake so far has been not to track the progress of the ongoing C buyback program, and that won't happen again!

 

I intend to hold on.

[Viking]

John, as I have stated before, the key to my US bank thesis is the health of, primarily, the US economy, and, secondarily, the global economy (particularly China).

 

In your comment above you stated:

“3. The US economy seem to continue to go ahead, despite a lot of noise, ups and downs & potential headwinds.”

 

My read is the US economy is doing VERY well with growth in Q2 possibly accelerating to over 3% growth (which is very strong looking at the past 10 years). More importantly, the US economy has not seen the benefits from US tax reform yet as it takes companies 12 months and longer to incorporate and execute into their strategic plans.

 

FedEx might provide a good example. They reported results last week and one of the questions had to do with capex in future years. “Obviously, we benefited greatly from the TCJA tax rate and 100% expensing for the next five years. That obviously makes capex investing less risky.  ...our capex is going to spike up in FY20 (Fedex just started fiscal year 2019 in June) and FY21 mostly as a result of Express.” The CFO said the decision around higher capex spend involves lots of factors and the lower US tax rate and 100% expensing are small factors in the overall decision process (I.e. they aren’t going to increase capex solely because of 100% expensing). I expect lots of companies to increase and pull forward investment spend in the US to take advantage of the new rules but it will take time to show up in the data; airplanes is a great example as it takes years from the time you place the new order to when you take physical delivery. This will provide a nice incremental benefit for the US economy and may help extend the current business cycle a little longer.

 

The economic reports out of the US continue to be very solid: https://www.calculatedriskblog.com/2018/07/ism-manufacturing-index-increased-to.html

 

The June jobs report on Friday will provide another important data point.

 

Gundlach also had an update June 12 and his reading of the leading indicators is there is no recession coming to the US in the next 12 months: https://doublelinefunds.com/webcast-schedule/

 

Yes, tariffs are a watch out. However, I do not see any impact on the overall US economy to date. The stock market (Mr Market) may freak out and sell off... or it may not. Trying to predict what Mr. Market is going to do in the short term is pretty much impossible for most people; and then to time stock trades around this guess (to profit) is even more difficult.

 

I think the risk that is not being discussed right now is if we see US GDP growth and wage growth accelerate in 2H 2018.

 

I do find it interesting that the 10 year US bond has not sold off more over the past month with all the doom and gloom talk in the media. I find bonds tend to be a better predictor of the future than the stock market. The US 10 year bond trading around 2.85% looks pretty bullish to me (on the US economy).

 

As I have said, as long as the US economy continues to chug, chug along I am happy to hold my big bank shares. The silver lining with low share prices is the banks will be able to buy a higher number of shares back with their large repurchases.

 

[HJ]

Thank you for your discussion on the banking business in general, and Citi in particular.  I think all the positive discussion seem to be very US focused.  The problem / issue with Citi is the fact that it's only 50% US (by revenue per 10-K).  Can we all make the same statement about Mexico, EMEA and Asia?  Is that worth 1-2 PE multiple relative to the other more US centric banks, JPM, BAC or WFC?  Or is the view that banking business in those geography are equally good?

[Viking]

HJ, you make a great point. Each of the large US banks are quite different animals. Currently my largest position (by far) is BAC, and one of the key reasons is it is more US focussed (than C).

 

Yes, C has the largest international exposure of the big US banks. What really appeals to me about C is valuation and capital return. The bank currently has a market cap of $171 billion. They are going to do $17.6 billion in stock buybacks the next 4 quarters and perhaps the same next year as well. That is 20% of its market cap in 8 quarters. Dividend is yielding 2.6% per year. This might make sense if this was a distressed asset. However, it looks to me that C is improving its operations each year and increasing the value of its underlying businesses.

 

Also, if the US economy continues to grow nicely I think it is likely this will keep the rest of world economies on the rails which will be good for C and their international exposure... we will see :-)

[StevieV]

Clearly, the market is not impressed with Q2.  I haven't reviewed closely enough to have a strong opinion.  Regardless, I will likely hold my small position.  I am holding not because I think C is necessarily a great operator, but because it is cheap.  Even moreso now.  Probably around 10 times 2018 earnings and 9 times projected 2019 earnings.

 

The capital return program has been approved, so the buybacks will keep the share count moving down.

[ourkid8]

Q2 results were OK, nothing impressive.  The most important takeaway is that the CEO confirmed they will exceed the $2.5B efficiency savings by 2020. They also may move forward additional growth/cost savings initiatives which were marked for post 2020 which is amazing.  Management guided in 2018 we will see a 100 basis point improvement in the efficiency ratio and then over the next 8 quarters we will see an additional 400 point improvement. 

 

Citi is the 2nd largest position in my portfolio and this cannibal stock is really cheap! We should see huge improvement in operations as they are targeting a low 50s efficiency ratio(52/53%) along with the massive share repurchase program in place (especially as the stock is selling below book) which will dramatically reduce the shares outstanding.  If we see revenue growth accelerate, that will be icing on the cake.

[John Hjorth]

Thank you Stevie & ourkid,

 

I'll give both your posts a +1. We need to hold on here.

 

- - - o 0 o - - -

 

Recently, - a couple of times, I think - Viking has brought up sale of C assets, divestments of activities, to release values, and to shake up C. I think last time was yesterday in the BAC topic.

 

Honestly, I haven't thought about C this way till now, but I consider it relevant. Valueact is invested in C. So what are your thoughts on this matter, gents?

 

- - - o 0 o - - -

 

[J/K] If this continues as it has done the last year or so, in some thousand years from now, perhaps, we'll be forced to discuss to setup a unlisted C holding company to pool our C shares - because we as a group here on C are the effectively controlling shareholders of the whole damn C - almost everybody else will then have been bought out by the bank itself - ... lots of privileges will be lost and disadvanges will pop up for us as group: No freedom here on CoBF to call the banks CEO an idiot or what ever, no longer no free speach about C for us here on CoBF. Add to that to take full overall responsibility for a sucker like this. - In short, our lives will become so miserable!

- However there will be at least some advantages for us too in that future situation:

1. It will look good on a business card to have with small print under our name: "Bank co-owner" [in fact you could add it right now, but perhaps the resonance blades a bit hollow right now]. It happens from time to time that the Lady of the House calls me a snob, and I don't always fight against feircely [because I can't].

2. There will likely be perks to us, too: Free diapers, to avoid damages inside the board room caused by our malfunctioning ring muscles! [/J/K]

[ourkid8]

Citi has been divesting businesses and exiting global retail banking for many years now so I am certain these tweaks will continue in the future based on profitability; This is business as usual.  I am not expecting anything dramatic like a total breakup of the company or selling core assets such as Banamex. 

 

Why do you consider this topic relevant? Do you really think Valueact will push for a total breakup?  I doubt it...   

 

 

Recently, - a couple of times, I think - Viking has brought up sale of C assets, divestments of activities, to release values, and to shake up C. I think last time was yesterday in the BAC topic.

 

Honestly, I haven't thought about C this way till now, but I consider it relevant. Valueact is invested in C. So what are your thoughts on this matter, gents?

[John Hjorth]

I'm just asking out in the open, ourkid,

 

And asking about how you think about it, from your personal angle and perspective.

 

Here is my personal take: I naturally don't know if Valueact consider their position a "passive" value play or an activist position. Time will tell.

 

No matter what will happen with regard to that, or some kind of other shareholder pressure from another angle, I speculate, Mr. Corbat will be very defensive against it, because he's not only the person responsible for execution of what had to go into the "the bad bank" to get sold or otherwise liquidated post GFC, he was also the person to plan and propose to the board what had to go and what would have to stay inside the "new post-GFC C".

 

If something inside C as is today develops into a serious laggard going forward, I suppose Mr. Corbat will take the intiative to dispose that activity him self, if he feels he can't fix it.

[Viking]

I agree, C results were ok. The good news is total profits are growing (RBC estimates to about $16.5 billion in 2018 and $17.2 in 2019). It looks like they will be able to harvest about $1 billion each year from their deferred tax asset (for the next +12 years) which increases the amount that can be returned to shareholders. This will increase regulatory capital by $17.5 billion in 2018 and $18.2 billion in 2019. Average shares outstanding were 2.7 billion in 2017, and are est to be 2.5 billion in 2018 and 2.25 billion in 2019. Regulatory capital will be increasing by $7/ share in 2018 and $8/share in 2019. Looks cheap to me.

 

The challenge for C is they seem to be struggling with how to grow sustainably as a company. JPM has been working a plan to grow for many, many years so it is very clear to investors what to expect. BAC appears to be in the process of turning the corner and it’s plans to grow are becoming more apparent (we will get another update Monday). C seems to be coming up with a new idea each year; almost like a gimmick. Two years ago, the growth engine was going to be US card business. Last year it was investments in Mexico. Today it is investments in digital banking. Their decisions over the years have been ok as total profits are growing. However, I am surprised that all of the pieces to their business are not fitting together better by now and their business results and strategies are not more organic and fluid. It feels like they spent years ripping the company apart to sell off units and downsizing. Now that they are largely done they need to pull all the remaining pieces back together and get them working together and this is proving a difficult task.

[ourkid8]

In all fairness to C, these growth initiatives take many years to take shape and I agree with you putting all the pieces back together seems to be a challenge.  On the Q2 call, they highlighted that they are in the process of removing the aggressive promotions for the US card business and there is a client retention of slightly under 50% which is amazing. 

 

It seems to me that their $2.5B+ in cost savings initiative is very similar to project BAC.  For BAC, once they achieved their cost savings target then at that point management's focus changed to growing the business.  C is currently trying to do both at the same time which is extremely challenging. 

 

C seems to be coming up with a new idea each year; almost like a gimmick. Two years ago, the growth engine was going to be US card business. Last year it was investments in Mexico. Today it is investments in digital banking. Their decisions over the years have been ok as total profits are growing. However, I am surprised that all of the pieces to their business are not fitting together better by now and their business results and strategies are not more organic and fluid. It feels like they spent years ripping the company apart to sell off units and downsizing. Now that they are largely done they need to pull all the remaining pieces back together and get them working together and this is proving a difficult task.

[Viking]

Ourkid8, my perception is BAC has been working pretty much the same plan for the past 5 years or so. In the early years, despite low profitability I think they were still investing in integrating (Merrill Lynch and old BAC etc) and growing the various business (especially in mobile). The result of this investment was their profitability lagged peers. They also were the slowest of the big banks to return large amounts of capital. Lots of work still needs to be done but there is a reasonably clear path forward for investors to follow to understand where BAC is going. Moynihan’s weakness might be his conservatism, but this also may be a strength for the bank moving forward especially when the next recession hits the US.

 

Citi, on the other hand, still feels like a work in progress. Investors still do not have a clear idea which part of Citi is going to deliver (enough) growth moving forward; legacy assets continue to run off and this is muting the top line numbers. Expense reductions in 2019 ams 2020 and large share repurchases is not enough on its own to get investors excited; they want to hear what the company is going to be doing to drive top line growth (like JPM and hopefully BAC). They are tired with Citi playing mostly defence and they want to see some offense. Last year during their investor day Citi took a big step in the right direction by providing investors with a credible plan to 2020; Citi did not build on this year old plan and it appears investors are not happy with their complacency.

 

I am fine sitting in the weeds with my C shares. EPS will be growing at a 12-15% per year clip the next couple of years. Dividend now yields 2.6%. If they find a way to get some more balanced and  sustainable growth in their top line then that will be icing on the cake.

[John Hjorth]

...Why do you consider this topic relevant? Do you really think Valueact will push for a total breakup?  I doubt it...   

 

...Recently, - a couple of times, I think - Viking has brought up sale of C assets, divestments of activities, to release values, and to shake up C. I think last time was yesterday in the BAC topic.

 

Honestly, I haven't thought about C this way till now, but I consider it relevant. Valueact is invested in C. So what are your thoughts on this matter, gents?

I'm just asking out in the open, ourkid,

 

And asking about how you think about it, from your personal angle and perspective.

 

Here is my personal take: I naturally don't know if Valueact consider their position a "passive" value play or an activist position. Time will tell.

 

No matter what will happen with regard to that, or some kind of other shareholder pressure from another angle, I speculate, Mr. Corbat will be very defensive against it, because he's not only the person responsible for execution of what had to go into the "the bad bank" to get sold or otherwise liquidated post GFC, he was also the person to plan and propose to the board what had to go and what would have to stay inside the "new post-GFC C".

 

If something inside C as is today develops into a serious laggard going forward, I suppose Mr. Corbat will take the intiative to dispose that activity him self, if he feels he can't fix it.

 

 

Valueact added 55.40 percent in 2018Q2, so Mr. Ubben & team are now at 15.25 percent.

 

Just a large bet? hmm ... hmm ... & more "hmm"! [ : - ) ]

[John Hjorth]

Citigroup Investor Presentation: CFO John Gerspach at Barclays Global Financial Services Conference [september 12^th 2018].

 

2020 expected efficiency ratio at 53 percent, effective tax rate now expected to be lowered going forward to less than 24 percent in 2020 [earlier expected around 33 percent], thereby expected RoTCE of 13.5 percent in 2020 [earlier expected around 11 percent].

 

Longer term RoTCE raised from around 14 percent to around 16 percent.

 

- - - o 0 o - - -

 

To me, this is indeed good news.

[villainx]

To me, this is indeed good news.

 

The update is primarily driven by repurchase, tax and cost cutting?

 

Has Citi been delivering on their targets? My memory is that they've been uneven, but improving of late.  Are the new targets realistic or aggressive?

[racemize]

To me, this is indeed good news.

 

The update is primarily driven by repurchase, tax and cost cutting?

 

Has Citi been delivering on their targets? My memory is that they've been uneven, but improving of late.  Are the new targets realistic or aggressive?

 

I believe most of it is driven by the tax changes (both lower tax and the fact that they wrote off a lot of DTA).  Citi has been hitting targets in the last year or so, but not so good before that.

 

I think the new targets are very realistic.  If they aren't, then there is a big problem at Citi.  Their targets are below most others until 2020.  In some sense, this is good news, as we are only betting on them becoming average and can get very good returns from that.  In other words, easier to revert to the mean than to outperform.

[villainx]

Their targets are below most others until 2020.  In some sense, this is good news, as we are only betting on them becoming average and can get very good returns from that.  In other words, easier to revert to the mean than to outperform.

 

That describes me!    :P

[ourkid8]

Everyone has been relatively quiet in this chat however we are all enjoying Citi's repurchase program which is creating tremendous shareholder value. 

 

-Q3 2018 vs Q3 2017 Citi has reduced it's shares outstanding by 9%

-Calendar year 2018 Citi has so far repurchased 5.23% shares outstanding

-Q3 2018 vs Q2 2017 Citi has repurchased 3.1% of their shares outstanding

 

Let's hope Citi accelerates their share repurchase program as the stock price has fallen. It's an absolute win/win scenario!

 

 

[Dazel]

 

I commented on the BAC warrant thread with regards to Citi’s buy back. In my opinion their greatest opportunity to create lasting value per share in their history. I expect them to go to the Fed and try to up their buyback on their 9 months earnings for 2018.

And agreed they should be changing their program to an all in (with in regulations of course)at these price levels. They could buy over 10% back here on forced and stupid selling volumes.

 

Buybacks should be opportunistic and this is one of those opportune times.

[Dazel]

 

 

This is $6.50 a share...(pre10for one split)

Time to bring the share count down another 10%...citi’s earnings were very good.

[Dazel]

 

 

On flat earnings and all things staying exactly the same...there would not be any shares left in less than 10 years...think about that.

[Viking]

C has a history of front loading their buybacks. BAC seems to do a similar amount each quarter; lets hope they get greedy now that others are fearful. Dalzel, let’s also hope BAC is able to get another $5 billion approved from the Fed. That would be sweet.

[Dazel]

For fun

Imagine that you could do this in a private company...every year you take the profits and buyout 10% of your partners shares at or below book value....year after year. You own all of it less than 10 years...$20b approx in “cash” profits become all yours. Year 11 you keep “all” $20b...

This is a Value stock 101...if anyone could take it private they would.