Bank of America Corp (BAC), Citigroup Inc (C): The Right Way to Think About This Bank

It wasn’t all that long ago that I was positively bearish on Citigroup Inc (NYSE:C), lumping it in with Bank of America Corp (NYSE:BAC) as a financial leviathan still deeply damaged from the banking crisis, still far from turning the corner back into operational normalcy, and therefore not a safe, profitable place for investors to put their money.

Bank of America Corp (NYSE:BAC)

Citi is still a leviathan, but it is turning that corner more quickly than I’d previously thought possible — quickly enough to convince me to buy a few shares as a sort of test run. Here’s a quick overview of how I think the bank is still currently viewed by investors and how I think it should be.

A glass half empty
Of the big four banks, B of A was unarguably damaged the worst in the financial crisis, but Citi wasn’t far behind. Both banks overindulged in the housing boom, and ended up with massive amounts of toxic mortgage debt on their books.

Citigroup Inc (NYSE:C) put its bad assets into a “bad bank” called Citi Holdings, which moved the toxic debt off the main balance sheet but didn’t absolve the superbank — or its investors — of the responsibility to deal with it. In the most recent quarter, Citi Holdings cost Citigroup Inc (NYSE:C) $1.1 billion in losses. In the first half of 2012, the losses totaled $2.02 billion.

Also, since the financial crisis, I think the leadership at Citigroup Inc (NYSE:C)p has mainly been at a loss as well. Vikram Pandit, the bank’s former CEO who came on in 2007, needs to be given credit for stabilizing the bank at what was undoubtedly its moment of extreme crisis (and repaying $45 billion in federal bailout money ), but also needs to take the blame for not maximizing the superbank’s significant assets.

One example of this is the sale of the remainder of Morgan Stanley (NYSE:MS) Smith Barney back to Morgan Stanley (NYSE:MS) last fall. It’s generally thought that Citi botched the deal, coming around too easily to Morgan Stanley (NYSE:MS)’s lowball valuation of the joint enterprise. The superbank ended up losing $2.9 billion on MSSB.

A glass half full
The good news regarding Citi Holdings is that the bad bank’s balance sheet and losses are both on the decrease.

In the fourth quarter of 2011, Citi Holdings’ net loss was $1.3 billion, but was just $1.1 billion a year later. And total assets in the bad bank were $156 billion for Q4 2012, 31% lower than for Q4 2011. Finally, the continuing resurgent housing market means poorly performing assets might get even more of a boost in the right direction moving forward.