Bank Of America Or Citigroup: Which Bank is a Better Buy?

By Michael French - January 24, 2012 | Tickers: BAC, C | 0 Comments

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Bank of America's (NYSE: BAC) stock trades around $7. The year high is $14.95, the year low is $4.92. The company has total cash of $606 billion against total debt of $740 billion. The trailing annual dividend rate is 0.60%. Earnings per share is negative at ($0.31).

Fourth quarter results show net income of $2 billion or $0.15 per share for the quarter compared to a net loss of $1.2 billion or ($0.16) per share for the same period in 2010. The yearly results indicate $1.4 billion or $0.01 per share compared to net loss of $2.2 billion or ($0.37) in 2010. Reflecting a marginal improvement in the domestic economy, commercial and industrial loan balances increased 13% from the same period in 2010. Small business loan operation was up 20% from the same period in 2010. These results reflect efficiencies achieved by the selling off of non-core assets such as the European and Canadian credit card business and streamlining services to clients. The company expects to continue to build capital, liquidity and manage expenses in 2012.

The fourth quarter report for the investment banking indicates that this division suffered losses of $443 million in the fourth quarter of 2011 following a loss of $302 million in the previous quarter. The same division had a $669 million profit in the fourth quarter of 2010. Fourth quarter trading revenue declined 44% from the same period in the previous year and was down 50% from the previous three month period. These figures include all accounting adjustments. Revenue from currency, fixed income, commodities fell 57% from the previous period in 2010 to $723 million reflecting the economic crisis in Europe and the investor exodus from the markets. The CEO, Brian Moynihan is said to be conducting a company-wide cost cutting review which hopes to eliminate $5 billion in annual costs and 30,000 jobs. In 2012, the investment banking division will be the epicenter of these cuts.

The preceding three years have not been kind to Bank of America. Its acquisition of Countrywide in 2008 brought forward an epic settlement of $335 million which was reported in December of 2011. The Justice Department announced that the company agreed that Countrywide had discriminated against Black and Hispanic borrowers during the housing boom. It is the largest residential fair-lending settlement to date. When it purchased Merrill Lynch in January of 2009 , it was immediately seen as a nightmare of troubled assets. In early December, 2011 the bank paid $315 to settle claim that they misled investors about the about the mortgage backed investment sold through Merrill Lynch. These fines are on top of $108 million in fines paid out in 2010 for over-charging customers on home loans.

In 2011, Bank of America sold down its interest in China Construction bank so that it owns only a five percent portion. The company sold off its European and Canadian card divisions, laid off 3,500 people and re-thought its position on charging debit card customers $5 per transaction after a customer petition threatened mutiny.

On August 24, 2011 the company announced Mr. Warren Buffett invested $5 billion in cumulative preferred shares with a coupon of 6%. Berkshire Hathaway also receives warrants to purchase 700,000,000 shares at a price of $7.142817 at any time for 10 years following the closing date. These warrants have been underwater for the most part since the investment was made. The company filed prospectus documents on November 22, 2011 to raise a further $3 billion in common stock.

It has attracted new capital, put some austerity programs in place and continues to raise capital through debt and equity offerings.

Regardless of what the bank has done right, it continues to be plagued by the Countrywide and Merrill Lynch acquisitions; the suspicion of its treatment of loan performance and loan losses; the European crisis; the ongoing mess that is the North American capital markets and the slow growing, perhaps relapsing to recession, domestic economy.

The stock is up from its year low and it appears that the market has already discounted the bad news and it is holding at these levels. It will take a very robust economy, capital markets that favour the investment in banks and banking institutions to favor the stock. While Berkshire Hathaway's investment may be seen as a vote of confidence, keep in mind that it is receiving a 6% coupon per year, it is a long term investor and the warrants that are currently under water can always be re-priced. Bank of America is a play on the U.S. economy at present. Growth in deposits, commercial and small business lending in the U.S. and the remaining assets in the mortgage portfolio may prove valuable in the long run should the economy and the real estate market in the U.S. turn around.

Citigroup (NYSE: C) stock trades around $29. The year high is $49.60, the year low is $21.40. Earnings per share are $3.75 and the price earnings ratio is around 8. The stock is maintaining at these prices as any recent bad news has not driven it down to its year low, but we still think that the stock's true recovery is years away.

Fourth quarter results for Citigroup indicate total revenues of $17.2 billion down 7% from 2010, net income of $1.2 billion or $0.38 per share down compared to $1.3 billion or $0.43 per share from the fourth quarter of 2010. Citigroup's 2011 full year net income was $11.3 billion on revenues of $78.4 billion, compared to net income of $10.6 billion on revenues of $86.6 billion for the full year 2010. The results in Citigroup were the result of the capital markets business where revenues declined by 10% over the same period in the prior year. Investors sat out the last quarter of 2011, cutting both volumes and transaction revenues.

The majority of the revenue decline in 2011 was driven by the ongoing reduction in Citi Holdings assets. Citi Holdings revenues of $2.8 billion in the fourth quarter 2011 were 30% below the prior year period. This decline was attributed to the continuing reduction in assets, which decreased $90 billion, or 25%, from the end of 2010. Citi Holdings assets at the end of the fourth quarter represented approximately 14% of total Citigroup assets. Citi Holdings houses brokerage and asset management (Morgan Stanley, Nikko and Primerica); local consumer finance ( CitiFinancial, CitiMortgage, and international consumer finance in Europe, India, Central and Latin America, Thailand and Hong Kong); and, the special asset pool described as assets covered by the loss-sharing agreement with the U.S. government parties in the ring-fenced portfolio; and other non-strategic assets. In the alternative, the special asset pool can be referred to as toxic assets and boat anchors on the Citigroup balance sheet.

The fourth quarter results were dismal compared to the September 30, 2011 quarter, which showed a profit of $3.8 billion, or $1.23 a share, compared with a $2.2 billion profit, or 72 cents a share for the same period in 2010. These results in the third quarter were despite a decline in investment banking revenues of 21% from the same period in 2010 to $736 million in September 2011. Overall, revenue was flat at $20.8 billion amid the global economic slowdown and turbulent capital markets. Citigroup delivered another $1.4 billion to its bottom line from its loan reserves which amounted to more than 85% of its earnings. Without these loan loss reserves it is evident from the fourth quarter results that without them, the bottom line suffers quite a bit.

Citigroup underwent a 1 for 10 reverse share split in March 2011. This split was not undertaken to increase either the value of the company or the share price. If anything the split was done to maintain the NYSE listing and get the shares out of the penny stock ghetto. Shareholders approved the reverse split as they had no choice, without it, their shares would remain worthless and hard to achieve any value on over time. The company maintained exactly the value it is worth after the capital markets meltdown, international financial crisis, hits as a result of their loan losses and bad mortgages and debts.

In junior markets, particularly the Toronto Exchange, share consolidations, management and business changes are a part of the everyday landscape. A venture exchange company manages to list, either with an asset that passes muster to the regulators or purchases one with stock and cash once listed. Either the asset performs and management performs or they don't. When an asset doesn't perform it is usually disposed of, or written off. The same fate awaits management that does not perform. Shares are consolidated, management changes and the whole process starts over again with a new business direction with bright, shiny new assets. Of course, there are differences between Citigroup and any venture listing. The Citigroup shares are listed on the most senior of the North American exchanges. It was a mature company with a long track record of operations, it had and continues to have a vast portfolio of underperforming/marginally performing assets, a complicated corporate structure and expenditures and performance problems worldwide. It is also a very different world since 2007. There was a market crash, a real estate meltdown, a recession in the U.S., an economic crisis in Europe, the threat of another recession in the U.S. and continued underperformance of the loan portfolios in the wake of the reverse split. By any measure, Vikram Pandit, new management, did what he had to do.

At the December 6, 2011 Goldman Sachs U.S. Financial Services Conference, the CEO, Vikram Pandit spent the bulk of this meeting discussing the plans for expansion and the optimism he has for the growth in emerging markets. Relative to Bank of America, it has less exposure in the domestic toxic asset market, but it is exposed in Europe, Central and Latin America and Asia and India. If growth slows down in Latin America, Asia and India, they may be facing the trouble on toxic foreign assets.

Both banks have had choppy years, performance wise as a result of domestic asset write downs, litigation, retreats in the investment banking divisions, especially those related to European performance. Bank of America is seen as more of a domestic play. Citigroup is building itself into an international banking giant. In the choice between the two, investors are betting on either domestic or international recovery. Pick your poison.

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