Is Citigroup Under Corbat Any Different From Pandit?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In October 2011, Michael Corbat replaced Vikram Pandit at Citigroup (NYSE: C). Pandit resigned as president and COO of the company and CEO of the bank's Institutional Clients Group, the position that he was holding since December 2007. During Pandit’s tenure Citigroup was reduced from the largest bank in the US to the number three position – its assets of $1.9 trillion lagged behind the $2.3 trillion of JPMorgan Chase (NYSE: JPM) and the $2.1 trillion of Bank of America (NYSE: BAC) (figures at the time of Pandit’s resignation).

On Jan. 17, 2013, Citigroup reported its figures for the fourth quarter 2012, which caused the stock to fall by 2.6% despite a jump in net income from $956 million in the same quarter the previous year to $1.2 billion when Mr. Pandit was in command.

Does this mark a turnaround for the hassled financial giant? Is Citigroup any different under Corbat than it was under his predecessor, who resigned in circumstances that triggered reports of a SEC investigation and statements that the company’s board should look into how it shares information with shareholders? Most importantly, what does Corbat mean for investors and shareholders alike compared to Pandit? Let us have a look.

A Little Bit of History

The timing of Pandit’s exit drew criticism from many quarters, particularly as Pandit was seen to have guided the bank through the financial crisis. Moreover, his resignation was seen as a forced decision as the new chairman of the board, Michael O’Neill, favored Corbat.  Additionally, although the third quarter 2012 results, declared on a day after which Pandit resigned, beat analyst forecast, Citigroup’s EPS fell from $1.06 to $0.69, a drop of almost 35%.

Just before Pandit’s resignation, Citigroup agreed to carve out internal hedge funds in order to comply with the Volcker rule that limits a bank’s speculative investments with shareholder money. Citi’s stake in Citi Capital Advisors (CCA), the division that controlled these hedge funds, was roughly $5 billion at that time. The carved out entity, in which the COO of CCA John Havens was willing to let managers have a significant stake, was to pay Citi back over time.

Is Citigroup Any Better Under Corbat– Shareholder’s Perspective?

I believe that it is too early to tell.

Pandit left Citi at the start of the fourth quarter 2012, and Corbat has been at the helm for only a part of the fourth quarter of 2012, which is too short a period for him to show quantitative results of his vision for the future of Citigroup.  According to Gary Townsend, president of hedge fund Hill-Townsend Capital LLC, "There's no reason that the quarter when Pandit left and (Corbat) came in should be great."

  • During Pandit’s tenure, businesses were cut and so were jobs – from 375,000 down to 262,000. Corbat also announced plans to lay off 11,000 employees, pull back from certain markets, including Pakistan and Turkey, reduce expenses, and add shareholder value. Corbat’s modus operandi may be different, but the outlook is apparently similar – that of shedding operating businesses either due to regulatory pressure or for cutting costs and firing employees.
  • When Corbat took over, the Street knew pretty little about him, except that he was a traditional banker who had been with Citi since 1983 after graduating from Harvard, and had overseen divestiture of more than 40 businesses before he moved on to his overseas appointment as chief of Europe, the Middle East, and Africa operations.

With a reputation as a traditional banker, the market expected Corbat to focus on traditional banking activities such as lending to businesses and consumers. The fourth quarter results do not tell much except that revenue from global consumer banking decreased by 19%, as compared to the third quarter when Pandit was managing the show. On the other hand, revenue from securities and banking decreased by 10% and there was no change in revenue from transaction services. Total Citigroup net revenue, however, increased by 30% (27% after credit and debt valuation adjustments). Instead of decreasing, total operating expenses were up by 13%.

  • Corbat is apparently more cautious and wary of taking excessive risks. On first signs that it was a tainted company and its investment might cause embarrassment later on, Citi announced that it was withdrawing its $187 million investment in Steven A. Cohen’s SAC Capital Advisors LP. The hedge fund’s manager was charged by authorities of using insider information for making profits.

In this there is a sharp contrast between him and Pandit, who joined the group’s management after selling to Citigroup an underperforming hedge fund, Old Lane, that he co-founded with John Havens, for $800 million, out of which $165 million went to him and later “carved-out” hedge funds under regulatory pressure.

  • Corbat is more dedicated to Citigroup, the company he joined way back in 1980s. He is also more circumspect.

In the last four years, most of it under Pandit, Citigroup sold assets worth $800 billion and shed 60 operating businesses. At Davos, he told CNBC that Citi Holdings still needs some more cleaning, but wanted to “see more progress” before going ahead with loan releases that the markets expect the company to make. He apparently wants the housing market to strengthen further and securitization to return before he thinks of shedding more businesses.

Another reason, as Chief Financial Officer John Gerspach said, was that although the housing market was stronger than before, he wanted to see how the government dealt with the so-called fiscal cliff and the debt ceiling debate. It appears that Corbat’s decision to reverse the expansion plan Pandit was pursuing is also based on these considerations

However, before we put the jury out on this, it is critical to keep in mind that Corbat has had to deal with legacy assets, and in all probability is still dealing with it. As admitted by Corbat, there is still a lot of cleaning to be done. The bank holds more than $150 billion of legacy assets, most of which are comprised of mortgage assets, and there is no guaranteed solution for that. To be fair to Corbat, we need to give him some more time before we judge his performance.

Competitors

At $42.80 a share, Citigroup is trading at a discount to its book value of $61.57 as well as tangible book value of $51.19, with a price to -book ratio of 0.70. JP Morgan, on the other hand, has a book value of $47.97 per share and is trading at P/B ratio of 0.97. While both banks have returned TARP funds, JPM, the largest bank in the US, received $12 billion compared to the $45 billion by Citi. JPM has a market cap of $188.5 billion as compared to the $125.95 of Citigroup. However, while Citigroup has an enterprise value of $188.84 billion, JPM has a negative enterprise value (-$37.75), according to Yahoo! Finance.  Bank of America, the second biggest US bank in terms of assets, has a book value of $20.24 per share and is trading at a P/B ratio of 0.57. With a market cap of $124.27 billion, BAC has an enterprise value of $134.18 billion.

​Conclusion

Personally, considering prior history and despite the fact that the financial sector is recovering, I would keep away from the banking sector. Investors need to keep in mind that by 2019, banks will have to raise capital under Basel III rules, global regulatory standard for capital adequacy, stress testing, and market liquidity risk for banks. However, for investors who have made up their mind to invest in any of the larger US banks, Citigroup appears to be a better bet.


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