A Global Franchise Bank for Long Term Investors
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Citigroup (NYSE: C) just announced its third quarter earnings results. It reported that GAAP earnings plunged due to a $4.7 billion write-down at Morgan Stanley’s (NYSE: MS). The reported third quarter net income was $468 million, with EPS of $0.15. It was nearly 90% lower than the $3.77 billion in net income and $1.23 EPS one year ago.
However, excluding CVA/DVA, its Q3 operating EPS was $1.06, beating analysts’ estimate of $0.97. The bank’s revenue for the quarter was more than $19.4 billion, 3% higher than the same period last year, and also higher than the prior quarter. The Cost of Credit decreased as much as 20%, and operating expenses fell 2% year-over-year. Those lead to a 46% increase in EBT and a 26% rise in Diluted EPS compared to Q3 2011. Furthermore, it has a Basel 3 Tier 1 Common Ratio of 8.6%, up 70 basis points. Investors can believe that the bank will have stronger capital ratios and better earnings for the stress test in 2013.
In addition, it is a good sign to see the bank’s operation shift to Global Consumer Banking, which reduces its exposure to the Securities & Banking segment.
Source: Citigroup’s Q3 2012 presentation
For the last 2 years, Global Consumer Banking has more than doubled its contribution to Citi's earnings, increasing from 21% to 46% of total earning. Securities & Banking segment has been trimmed down from 51% to only 29%.
Citigroup’s net interest margin has increased from $2.81% to $2.86%, whereas Wells Fargo (NYSE: WFC) experienced a decline in its net interest margin, from 3.91% to 3.66%. Citigroup’s current margin is higher than those of JP Morgan Chase (NYSE: JPM) (2.43%) and Bank of America (NYSE: BAC) (2.21%), and is only lower than Wells Fargo's.
Indeed, it seems that Citigroup is able to continue to add high margin loans in developing economies, whereas the other US and European banks experienced a deleveraging process, with less loan demand and overall low interest rate environment. So I think the shift to the global consumer banking segment will benefit Citigroup over time.
After the earnings announcement, Citigroup’s stock price shot up 5.5%, from $34.75 to $36.66. Its current market capitalization is $107.5 billion. It is trading at 0.55x P/B, only slightly more expensive than Bank of America at 0.45x P/B. However, it was much cheaper than WElls Fargo at 1.26x P/B and JP Morgan at 0.86x P/B.
My Foolish take
David Tepper, Michael Price, Mario Gabelli and Ray Dalio all bought Citigroup in the second quarter for their portfolios. Its operating shift to the global consumer banking segment, the increase in net interest margin, and the high margin loans in the balance sheet are all advantages and improvement for the bank. With its presence and franchises all over the world, Citigroup can be considered as a long term holding for value investors.
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hoangquocanh 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.