Thursday, July 18, 2019

A Mostly On-Target Citigroup Slowly Grinding Higher

Citigroup (C) has been a frustrating and unpopular long call, but the shares have at least outperformed the larger banking sector over the last quarter and the last year. Citi continues to trade well below where its return on tangible common equity suggests it “should” (based on long-term relationships between ROTCE and P/TBV), but that’s not an uncommon occurrence in the bank sector, and generating a higher ROTCE remains a frustratingly slow process for this bank.

Given the significant gaps in profitability (as measured by pretax banking profits) between Citi and peers like JPMorgan (JPM) and Bank of America (BAC), there would seem to be ample room for improvement, but Citi management seems disinclined for more comprehensive restructuring, even while lamenting (some might say “whining about”) the comparative valuation of the shares.

I continue to believe that the inherent value of Citi leaves the bank and its management in a “fix it... or we’ll find somebody who will” state, and I think the board may come under pressure to make some changes if ROTCE doesn’t improve more dramatically over the next 12-18 months - something that could be difficult given where we are in the rate and credit cycle. Either way, I believe these shares remain meaningfully undervalued, but it’s going to take a lot of patience and a high frustration threshold to own these shares.

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A Mostly On-Target Citigroup Slowly Grinding Higher

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