Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Citigroup Inc. (C) Settles FHFA Suit. Here’s Why It’s Still a Buy

Page 1 of 2

U.S. stocks opened lower this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average down 0.47% each at 10:05 a.m. EDT.

Did just agree to be ransomed, or is the bank just wisely paying to move forward? Citigroup Inc. (NYSE:C) has broken with its peers in settling one of the last post-crisis lawsuits brought by the Federal Housing Finance Agency against 17 banks in 2011. The FHFA’s claim was that the banks had mis-sold mortgage-backed securities to Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that were effectively nationalized in 2008 at the height of the credit crisis.

Citigroup Inc (NYSE:C)Citigroup Inc. (NYSE:C)’s decision looks like a smart one to me. According to the Financial Times, similar lawsuits have been settled for “cents on each dollar” of the total principal amount in question. For Citi, that principal amount is $3.5 billion, so a rough estimate of the settlement doesn’t look exorbitant, particularly once you compare it to the opportunity cost of diverted management time and focus, the tangible cost of high-priced securities and litigation lawyers, and the drag these lawsuits have had on the multiple that investors have been willing to award the stock.

Admittedly, investors have already rerated the shares, which finished last year at a price-to-tangible-book-value multiple of 0.75. As of yesterday’s close, the stock was poised to trade at or above its tangible book value for the first time since the second quarter of 2011, with a multiple of 0.99. That increase has enabled Citigroup Inc. (NYSE:C) shares to outperform those of its two nearest peers and the S&P 500 year to date:

C Total Return Price Chart

C Total Return Price data by YCharts.

How far does the stock have to run? In an interview published in Barron’s on May 18, legendary value investor Leon Cooperman outlined his thesis for the stock:

One of our holdings is Citigroup Inc. (NYSE:C), which trades at around $50, or roughly 0.9 times tangible book value. We believe the new management at Citi can more than double its return on tangible equity in the next two to three years by reducing the drag from the runoff of the Citi Holdings entity, which consists of businesses and portfolios that the company is exiting.

Page 1 of 2
Loading Comments...