Citigroup Inc. (NYSE:C) recently made double the news, releasing the results for the third quarter of the year followed shortly by the announcement that CEO Vikram Pandit would be stepping down and would be replaced by Michael Corbat. Corbat had previously been head of the bank’s operations in the Europe, Middle East, and Africa (EMEA) region and has worked in many of Citi’s divisions including commercial banking and wealth management.
The numbers for the third quarter beat analyst expectations, which Citigroup Inc. had also done in each of the first two quarters of the year, despite being a decline from the third quarter of 2011. Specifically, net interest revenue was flat and non-interest revenue was down 23%, pulling total revenue down by 9% as net interest is the larger source of business. Total revenues were down 2% on a q/q basis. Net income was also down, by twice as much as revenue in both cases. Loans and deposits, meanwhile, were up; in some cases, there was a double-digit percentage increase from a year earlier.
Citi still trades at a substantial discount to book value at a P/B ratio of 0.6. We certainly wouldn’t say that it should be trading at book value- the situation in Europe, to which Citi has quite a bit of exposure, leads us to be skeptical of the book value of the bank’s assets- but this is still a low number. The beta is 1.9, reflecting the fact that bad macro conditions threaten an already questionable balance sheet. Citi has rallied this year, up 32%; this is a little over twice the return of the S&P 500. It currently trades at 8 times forward earnings estimates.
Citigroup Inc. was the most popular financial stock among hedge funds during the second quarter of the year, and was actually one of the ten most popular stocks as well. It was one of Appaloosa Management’s favorite stocks, as billionaire David Tepper’s fund increased its stake by 52% to a total of 9.3 million shares. This position had a market value of over $250 million at the end of June (find more of billionaire David Tepper's favorite stocks). Fellow billionaire David Shaw’s D.E. Shaw more than doubled its own holdings of Citi, and had 1.8 million shares in its portfolio at the end of June (see more stock picks from D.E. Shaw).
We would compare Citigroup to Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), HSBC Holdings plc (NYSE:HBC), and Wells Fargo & Company (NYSE:WFC). Bank of America is the most similar to Citi in terms of its book valuation: it actually trades at a P/B of 0.5. Like Citi, its revenue and earnings were down in the third quarter versus a year earlier, and its beta is also 1.9. Bank of America trades at a premium to Citi on a forward earnings basis, with a P/E of 10 based on analyst consensus for 2013. This actually gives it the highest forward P/E of this peer group. Even Wells Fargo- which trades at a premium to the book value of its equity, at a P/B of 1.2- carries a forward P/E of 9. We also like that Wells Fargo has been experiencing growth in its business, and the gap between its and Citi’s valuation multiples has been closing enough that we think the two banks are starting to look similarly attractive.
JPMorgan Chase and HSBC both trade at 8 times consensus earnings for 2013. HSBC does offer a higher dividend yield- at 3.7% to JPMorgan Chase’s 2.9%- but JPMorgan Chase did well in the third quarter in terms of growth (earnings were up 34% from the same period in 2011), trades at a discount to book value at a P/B of 0.8 (HSBC trades at book value), and actually trades at only 9 times trailing earnings, meaning it has to see little growth to meet analyst targets.
We don’t like Bank of America as a long idea anymore (though the stock has done well over the last few months). HSBC also seems questionable from a value perspective. We would say that Citi, JPMorgan Chase, and Wells Fargo form a consistent continuum where the more stable JPMorgan Chase and the considerably more reliable Wells Fargo trade at appropriately higher multiples with little opportunity for pair trades between them.