A New Beginning for Citigroup?

By Bill Edson - October 22, 2012 | Tickers: C, JPM, WFC | 0 Comments

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Vikram Pandit recently stunned the financial world by suddenly quitting as Chief Executive Officer of Citigroup (NYSE: C). Pandit was immediately replaced by Michael Corbat, the former CEO of Citigroup’s divisions in Europe, Africa, and the Middle East. While there were rumors that Pandit was arguing with Citigroup’s Chairman, Michael O'Neill, his sudden departure caught investors completely off guard. I was particularly surprised by this news as just the day before Pandit quit, Citigroup held a financial call with analysts and reporters and didn’t give any sign that Pandit was leaving.

While I don’t think it’s ever a great sign for a company when its CEO unexpectedly quits, Citigroup doesn’t seem to be badly affected by this event. The market seemed to shrug off the news of Pandit’s departure as Citigroup’s share price rose by about 2% the next day. I also see many signs that Citigroup could have a strong rebound with its new CEO.

Under Pandit’s leadership, Citigroup has done very poorly. When Pandit became CEO in December 2007, Citigroup’s stock was trading around $330 per share. Since this time, the price has collapsed to its current price of $38.43, a fall of nearly 90%.

Now I don’t think this is all Pandit’s fault. A big part of this drop came from the financial collapse in 2008, something that Pandit couldn’t have avoided. However, investors have a right to be upset that Pandit hasn’t done more to make the company recover. Citigroup competitors JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) were also badly hit by the financial crisis, but these two banks have done a much better job of regaining their lost share value. Over the same five year period that Citigroup lost about 90% of its share value, Wells Fargo grew by 6% and JPMorgan Chase grew by 2%. 

This could partly explain investors’ newfound optimism for Citigroup. It’s possible that investors think things were so bad with Pandit, they can’t get any worse with a new CEO.

Another reason why Citigroup shouldn’t get any worse is because as a company it is simply too big to fail. Citigroup is the third largest bank in America in assets, behind only JPMorgan Chase and Bank of America (BAC). The government's past actions have shown that it is unwilling to let a company the size of Citigroup go under. The federal government has propped up Citigroup with bailouts, subsidies, and guarantees on its debts. While Citigroup looks stronger today, I believe the government would step in again to help if things got worse.

Not only does Citigroup seem like it is unlikely to get any worse, there are also a few reasons to feel optimistic about the company’s future. The American economy seems to be getting better. In October, the U.S. Bureau of Labor Statistics measured a 7.8% unemployment rate in America. This is the first time since 2009 that unemployment fell below 8%.

The economy’s new strength is being reflected in the housing market. Housing prices grew by 15% in September to their highest point in four years. A stronger housing market means Citigroup will be able to make mortgage loans and should see a drop in mortgage defaults. This should be welcome relief to Citigroup as it has been getting pummeled by mortgage defaults. Citigroup currently holds $95 million of unwanted housing assets and is losing close to $5 billion a year from its mortgage division, according to analysts from Goldman Sachs (GS).

Increased consumer spending should also help Citigroup. Citigroup, Wells Fargo, JPMorgan Chase and Bank of America issue roughly half of new mortgages and two thirds of new credits cards in America. As consumers start buying new homes and spending more on their credit cards, Citigroup should be in a position to benefit from this growth.

To Pandit’s credit, I can see that some of his actions put Citigroup in a position to benefit from a growing economy. Over his 5 years as CEO, Pandit significantly restructured the company and reduced its workforce by about 1/3. Now that Citigroup is more efficient and has lower overhead, it should be more profitable going forward. Pandit also explained that it was a good time for him to leave. By leaving now, Pandit gives the new CEO time to develop his own 2013 strategy. If Pandit had stayed to the end of the year, the transition could have been messier as Corbat would be inheriting Pandit’s plan for 2013.

Now things are still far from perfect at Citigroup. While its mortgage division shows signs of recovery, $95 billion of unwanted housing assets and a greatr than $4 billion annual loss are tough to recover from. While the U.S. economy has had a few strong months, it will take a long and sustained recovery to repair Citigroup’s balance sheet. If the European Crisis or the looming debt cliff in America cut out its recovery, Citigroup will also see its gains wiped out.

In addition, the government is still limiting Citigroup’s ability to return capital to its shareholders. Citigroup is only allowed to pay a penny dividend per share to its shareholders each quarter. Citigroup hoped that it would have these restrictions pared back in 2012, but it seems that it may have to wait until at least 2013. This means Citigroup’s investors have to deal with very low dividend rates until this restriction is lifted.

Citigroup is still far from a perfect investment. It still has many problems that need to be solved and its new CEO is going to have his hands full. However, it seems to be holding on quite well for a company that has just been abandoned by its CEO. The market seems to think things can only get better as Citigroup’s share price rose by a total of 4.8% in the three days after Pandit’s departure. While Citigroup probably won’t regain all its share losses anytime soon, it seems to be on track to start making that climb with a new leader in America’s growing economy. 

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