Would I Buy Citigroup Stock Right Now?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Financial Sector has been rocked for a while and many of the banks are starting to make a turn around. Make no mistake, each still has challenges to face and restructuring measures to take in order to bring them back to profitability. Let’s take a look at banks in general and focus on one bank in particular that is transforming itself—Citigroup (NYSE: C). Let’s also answer the question: “If I invest in this stock now what can I expect in the immediate future from the company?"
State of the Banks
There has been a decrease in trades for investment banks that has caused the likes of Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) to report losses in double digits. Traditional banks have fared a little better from traditional business but not every bank has been able to hold off losses. Wells Fargo (NYSE: WFC) has done well, but Citigroup and Bank of America (NYSE: BAC) have ended up with the same results. BAC recorded a profit which was helped by the fact that it was able to reduce a good portion of its mortgage loss reserves. Both Citigroup and Bank of America have a long way to go in order to catch up with with the profitable banks like Wells Fargo.
The Two Parts of Citigroup
Citicorp is the profitable half that includes consumer, corporate, and institutional banking as well as transactional services. Over 90% of Citigroup’s revenues come from this section. Then there is Citi Holdings. This is the bad part of the business. It is weighed down by toxic mortgages that it is trying to dump. The bank has been aggressively reducing its portfolio through sales by the billions since 2008, but it is still a major boondoggle for the company. Just to give you an idea how bad it is. If one could remove Citi Holdings from Citigroup, the banks return on equity figures would double!
Citigroup Reduces its Mortgage Portfolio
Back in 2008 Citigroup was holding $200 billion plus in mortgages and it started out by trying to dump $45 billion of that to help reduce its risk. This was just a start. By the end of June of this year, it was still burdened with $100 billion and Chief Executive Officer Vikram Pandit is still unloading unwanted assets from its Citi Holdings. As an example of how it is reducing its portfolio, Bank of America pioneered a program allowing delinquent borrowers to rent their homes. Using the same type of program, Citigroup sold $158 million of mortgages to a joint venture of two investment funds as another way to dispose of unwanted home loans. Oaktree Capital Group LLC (OAK) and Carrington Holding Co. bought the loans.
Citigroup’s Transformation
In the second quarter, Citigroup beat the consensus estimates of analysts, but like many banks, was down from the previous year. 2008 was a big surprise for the financial markets and since that time the company has been redesigning itself, improving its financial position and how it does business. It has been transforming into a more traditional bank. Consumer banking brings in close to half its earnings while earnings from securities and banking have been cut in half. It looks a lot less risky than before 2008 when it was more of an investment bank. This transition may open a lot of doors for the bank. Consumer banking business has strong franchises in Latin America and Asia which means that the bank would benefit from the growth in these emerging markets.
Is Citigroup a Good Buy Right Now?
Considering Citigroup has such a good price and is trading in a channel, would it make a good stock for my portfolio? One thing any investor would have to admire about the company is its journey from investment bank to traditional bank. And I know I wrote this before but I think it is important to repeat. A traditional structure provides more stability and also has incredible potential for growth in the emerging markets like Latin America and Asia. This is the positive. But would I buy it right now? It is trading in that lower trade zone, and I do not see any events that will occur in the near future to raise the stock. So personally, I think it may be some time before Citigroup will move up. It still has to deal with the Citi Holdings side of the business and until this is about done the stock will still have huge challenges. If one invests in Citigroup right now, I would not expect any real grow or significant movement through this year and into 2013.
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