Citigroup Inc (C), JPMorgan Chase & Co. (JPM): Who’s Future Is The Brightest?

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When I look at Citigroup Inc (NYSE:C), I can’t help but think of something that Peter Lynch said about Fannie Mae years ago. I know that people have bad feelings about Fannie Mae today, but when Lynch was managing Fidelity Magellan, this was one of his best performing stocks. He picked Fannie Mae because he saw the company’s long-term opportunity, though others saw current problems. This is exactly what is happening with Citigroup Inc (NYSE:C). Short-sighted investors are focused on the company’s problems, while long-term investors can imagine the company Citigroup Inc (NYSE:C) can become.

Citigroup Inc (NYSE:C)

The old and the new

Of the big banks, Citigroup is the only one I know of to create a pseudo “bad bank” to account for their problem assets. One of Citigroup’s competitors, Bank of America Corp (NYSE:BAC) comes closest, by detailing the decline in problem assets. However, other competitors like JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) choose to include their old and new assets together.

The nice thing about Citigroup Inc (NYSE:C)’s approach is, investors get a very clear picture of where the bank has been, and where it is going. The company identifies the “old” Citigroup assets as Citi Holdings, and the remainder of the bank as Citigroup. The company is already performing well without this distinction, but if you remove the challenges posed by Citi Holdings, you have a real diamond in the rough.

No one would have believed this a few years ago

Probably the number one reason Citigroup Inc (NYSE:C) may do better than many think is the company’s credit quality has improved dramatically. When we are talking about big banks, credit quality is an issue that is front and center in most investors minds. The bank is already doing well, but if we look past Citi Holdings, the company is crushing the competition.

Comparing credit quality between banks comes down to two different measures. First, investors need to look at the bank’s non-performing loan percentage. Since non-performing loans are very likely to be written off as a loss. The second number investors need to watch is the bank’s coverage ratio. Generally speaking, a bank with a low percentage of non-performers, and a high coverage ratio is a safer bet.

When you look at Citigroup Inc (NYSE:C)’s total non-performing loans percentage, it currently stands at 1.72%. Relative to their peers, only JPMorgan Chase & Co. (NYSE:JPM) can claim a lower percentage at 1.60%. By comparison, Bank of America Corp (NYSE:BAC)’s non-performing percentage is 2.53%, and Wells Fargo & Co (NYSE:WFC) is at 2.44%.

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