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Citigroup Inc (C): Big Banks Could Mean Big Gains

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Citigroup Inc (NYSE:C) is one of the largest financial institutions in the world, with operations in over 100 countries all around the world. Citigroup gained notoriety as one of the hardest-hit banks during the financial crisis and is one of the reasons the phrase “too big to fail” came into being. Citigroup shares were worth over $550 (split-adjusted) before the crisis, and are now worth about one-tenth of that. After the dilution required to pay back the bank’s numerous government bailouts, existing shareholders’ equity is now just 26% of what it used to be. However, Citigroup Inc (NYSE:C) has made significant improvements to its business in the years since, and the bank is expected to grow its earnings at an impressive rate over the next few years. Is Citigroup worth getting into at the current share price, or would we be better off investing in one of the other big banks?

Citigroup Inc (NYSE:C)

A post-crisis history of Citigroup

Citigroup Inc (NYSE:C) entered its current era in October 2008 when the company raised $25 billion in capital from the U.S. Treasury’s TARP program. The government subsequently infused an additional $20 billion just two months later as part of Citigroup’s bailout. Finally, in January of 2009, Citigroup issued the government $7.3 billion in perpetual preferred stock as well as warrants to purchase common stock in exchange for the government agreeing to enter a loss-sharing agreement on a portfolio of Citigroup’s bad assets.

Throughout 2009, there were three occurrences that led to the extreme dilution of Citigroup Inc (NYSE:C)’s shares. First, in February Citigroup announced that it would convert $27.5 billion of its existing preferred stock (not the government’s) to common stock. Also, in two separate transactions, the government’s $45 billion was repaid, $25 million with common stock and $20 billion in cash raised from offering common stock on the open market.

Recently, Citigroup has taken measures to improve its capital levels and the credit quality of its asset portfolio, and to stabilize its revenues. As a result, Citigroup Inc (NYSE:C) passed a recent “stress test” that determined Citigroup’s Tier 1 common capital ratio would remain at 8.3% after a severe recession, a relatively high figure compared to the average of 7.7% among the 18 bank holding companies subjected to the test. In fact, Citigroup has improved to the point that it recently announced a $1.2 billion share repurchase program, which is a step in the right direction to restore the value lost by their shareholders.

Growth and projections

Over the next few years, the continuing economic recovery in the U.S. should be the primary driver of Citigroup’s growth. The recovery should mean increased home buying activity, more mergers and acquisitions among corporations, and increased interest income. Over the next year or two, as Citigroup Inc (NYSE:C) continues to strengthen its balance sheet, it should be able to return even more capital to shareholders in the form of both buybacks and dividend increases.

Citigroup is expected to earn $4.72 per share this year, which means that the company currently trades at just 10.5 times this year’s earnings. The company is projected to earn $5.44 and $6.07 in 2014 and 2015, respectively, according to the consensus of analysts who cover the company. I understand that there is significant risk involved when investing in Citigroup, but a company with a P/E that is barely in double digits and a 13.5% forward earnings growth rate sounds pretty enticing to me.

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