Hot Time in the Citi
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the aftermath of Citigroup’s (NYSE: C) abrupt change of leadership, many commentators are using the incident as a basis to take shots at the vast banking empire. While there is little question that Citi has various issues which must be addressed, adopting a tone of misanthropic criticism is neither beneficial nor informative when considering the company for investment. Rather than using the future of Citi as a creative hook to bash Wall Street or advance a political agenda – when these things are tied together, the results are inevitably lacking in real depth – considering the direction that Michael Corbat, the new CEO, will take should inform our position toward the stock.
The Anti-Golden Age
Vikram Pandit took over the top spot at Citi in December 2007, less than a year before the entire financial industry faced its most serious threat since the Great Depression. Since he took the helm, the stock is down nearly 90%, has been dubbed “too big to fail,” has taken significant bailout assistance from taxpayers and has now seen the ushering in of what many hope will be a new era for the company. The company has arguably become too diversified and unwieldy to manage, leaving it a victim of its own success.
Despite the above negatives, Pandit was at the helm during an impossible era, having inherited many of the problems with which he is blamed. Referring as his tenure as “his five year reign of terror,” or the banking industry as full of “Too Big to Regulate” banks is a nice punch line, but is such a painful oversimplification as to render that article’s surrounding observations suspect at best. This is not to suggest that Pandit is without culpability – during the same period, J.P. Morgan Chase (NYSE: JPM) CEO Jamie Dimon has risen to near-celebrity status – but I prefer to look at the way forward.
The Corbat Years
As Mr. Corbat takes the reigns, speculation abounds as to what direction the company will take. Corbat, who is known for his risk management skills, is expected to focus on the upcoming stress tests, divesting “bad” assets and profiting from the bank’s strong position in emerging markets. In this final category, Citi has been recognized as a leader in securities lending for the last three years and is expected to build on this positive position within the marketplace. This has been a key area amongst many global banks, making Citi’s position here an important part of its future success.
One of the most critical areas of focus for Mr. Corbat must be the relationship between the company and the government. Citi was the only bank to fail a recent stress test and one of the largest recipients of taxpayer assistance during the crisis. If Citi can leverage and then end this relationship, falling more cleanly inside of the proverbial lines, the institution should benefit.
The change of leadership has been credited as a catalyst for the credit rating upgrade from “negative” to “stable” by Moody’s. The upgrade has drawn concern from some, but highlights the sentiment of the street on the transition. Whether real or perceived, new leadership is being viewed as a potential catalyst for the reinvigoration of the vast Citi empire.
When compared to competitors like J.P. Morgan, Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC), the numbers are simply not compelling. Even with the cataclysmic plunge in the stock’s price, Citi still trades at a trailing multiple of 15.6; J.P. Morgan trades at 8.8, Wells Fargo at 10.7 and Bank of America at 25.3. Other major metrics stack up similarly, leaving J.P. Morgan as the most attractive bank amongst the largest players.
As a speculative play, however, there is an argument to be made for Citi, albeit a weak one. The company recently began paying a tiny dividend and is taking positive steps towards removing itself from life support. Ultimately, by the time we know if Corbat can turn the company around, the stock will have moved significantly. If you’d like to bet on his success, with the government’s protection of Citi as a safety net, the stock is interesting.
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.