4. Citigroup Inc. (NYSE:C)
Latest TTM Net Income: $12.3 billion
Number of Hedge Fund Holders: 79
Citigroup Inc. (NYSE:C), commonly referred to as Citi, is an American multinational investment bank and financial services corporation incorporated in Delaware, with its headquarters located in New York City.
On November 2, Bloomberg reported that Citigroup Inc. (NYSE:C) and The Goldman Sachs Group had been chosen to lead the initial public offering (IPO) of Ibotta, a digital marketing software firm. The expected valuation for the IPO is $2 billion, and it is anticipated to take place in the upcoming year.
As of the end of the third quarter of this year, Insider Monkey’s survey of 910 hedge funds revealed that 79 had purchased and held shares of Citigroup Inc. (NYSE:C). Among these, the largest investor is Warren Buffett’s Berkshire Hathaway, with a stake valued at $2.2 billion.
Silver Beech Capital mentioned Citigroup Inc. (NYSE:C) in its third quarter 2023 investor letter. Here is what it said:
“Citigroup (“Citi”) is a large-capitalization global diversified financial services holding company that primarily serves multinational institutional and high net worth consumer clients. Citi is one of three large American banks to be designated in “bucket 3 or 4” of the “global systemically important bank” (“G-SIB”) framework by The Basel Committee on Banking Supervision. The other banks in this group are J.P. Morgan and Bank of America.
As a G-SIB, Citi is subjected to increased regulatory supervision by global bank regulators and central banks. Enhanced regulatory supervision was an important post-crisis reform to strengthen the global financial system by increasing bank capital ratios, transparency, and decreasing risk-taking. These reforms resulted in the largest G-SIBs moving away from risk-oriented banking activities such as advisory, high-yield lending, and trading, towards lower-risk activities. Indeed, Citi’s most valuable, high-growth segment, Treasury and Trade Solutions, is in lower-risk and entrenched activities such as liquidity and cash management, payments, trade solutions, and automated receivables processing. In our view, somewhat unintuitively, Citi’s increased regulatory supervision contributes to the company’s less risky banking business model, and thus its attractiveness as a downside-oriented investment opportunity.
Citi’s market perception suffers from the bank’s negative historical reputation. In 2008 during the Great Financial Crisis, Citi received the most TARP funding (the largest “bailout”) of the U.S. banks. TARP funding was provided by the U.S. government to forestall a liquidity problem that threatened to become a solvency problem. More recently, Citi mistakenly used its own capital to pay lenders when acting as Revlon’s loan agent, resulting in a $400M fine by the Federal Reserve and orders to resolve internal controls (which Citi fulfilled). Citi’s large global consumer bank was assembled by prior management in the early 2000s to attract and service high-end global consumers. Unfortunately, this pivot was costly and ill-timed in the context of increasingly complex multi-jurisdictional regulation to prevent money laundering and tax evasion. The global consumer bank has been a drag on Citi’s overall performance.
We believe the market dislikes Citi for these historical reasons and because Citi earns lower returns on equity (“ROE”) than its peers. In 2023, Citi has so far earned an ROE of ~7%, compared with peers that earn 10%+ ROEs. Recognizing that Citi is less valuable than its peers because it is a lower performance bank, we would argue that Citi’s valuation is still far too low. We believe the market is over-discounting Citi at its current valuation of ~0.48x tangible book value (“TBV”)…” (Click here to see the full text)
