Betting on a Turnaround: Citigroup’s Path to Recovery

by Warren Seah

As an investor, patience is a virtue when it comes to betting on a turnaround. This rings especially true for Citigroup (ticker: C), the third-largest bank in the country. For years, Citigroup has lagged behind its rivals, such as JPMorgan Chase and Bank of America, in terms of share price, profitability, and overall success.

While a quick fix is unlikely, the current state of Citigroup presents an opportunity to park some cash and potentially reap the rewards of better days ahead. With its stock trading at half its tangible book value and near 15-year lows, it may be a sensible move for those seeking a 5% yield.

Under the leadership of CEO Jane Fraser, who assumed the role in March 2021, Citigroup is taking decisive action to accelerate cost-cutting measures and regain the confidence of investors. According to a CNBC report, the bank may be laying off 10% of its 240,000-person workforce. While the bank has not confirmed this figure, it has acknowledged that cuts are indeed imminent.

This downsizing initiative aims to address Citigroup’s bloated cost structure, which has been a significant drag on its profitability. Currently, the bank generates only $56,000 in profit per employee, significantly lower than JPMorgan’s $165,000 and Bank of America’s $143,000. Consequently, Citigroup’s efficiency ratio, which measures noninterest expenses over revenue, stands at 68%. In comparison, JPMorgan and Bank of America boast efficiency ratios of 52% and 64% respectively, indicative of more streamlined operations.

To improve its ailing stock performance, Citigroup is committing to other strategic measures. Since 2021, the bank has been downsizing its global operations and is poised to exit nine markets entirely by the end of the year. Additionally, the organization’s reorganization plan, announced in September, includes a reduction in layers of management.

Recognizing the importance of transparency in winning over investors, Citigroup is also planning to simplify reporting and provide greater visibility into its underlying divisions, including its thriving services business. Chief Financial Officer Mark Mason emphasized the value of transparency in an interview.

While the road to recovery may be challenging, Citigroup’s efforts to cut costs, reorganize, and prioritize transparency indicate a commitment to favorable change. Investors who recognize these potential catalysts may find Citigroup an attractive option amidst its current struggles.

What Investors Really Want: More Profitability

Investors have their sights set on one thing: profitability. However, Citigroup, with a return on tangible equity of just 7.7%, falls short compared to its peers, Bank of America and Wells Fargo, which boast a return of 11%. Despite this, Citi is determined to reach that target within the next three to five years.

Investors, understandably, have reasons to be skeptical about whether these plans will actually deliver results. After all, Fraser is the third CEO since the financial crisis in 2008-09, and previous promises of strategic shifts and increased profitability have failed to significantly impact Citi’s stock. While shares have remained relatively stagnant for the past 15 years, JPMorgan’s stock has quadrupled, and other banks have experienced double-digit gains.

But some investors see potential in Citi’s turnaround efforts. Edgar Wachenheim, chairman of asset manager Greenhaven Associates, highlights the cash-management division as a major contributor to earnings power, accounting for 35% to 40% of profits. Given that Citi’s stock is currently trading at half its tangible book value, Wachenheim believes there is a “rare opportunity” to invest in a well-capitalized bank with significant upside potential. According to him, Citi’s stock could reach $100 in the coming years.

Another analyst, Chris Kotowski from Oppenheimer, also sees a positive outlook for Citi’s shares. He believes the stock could trade up to its tangible book value, slightly below that of its peers. As a result, he values the stock at $82, stating that Citigroup presents a deep value for investors despite being out of favor with the current value style of investing.

Although Citigroup is playing catch-up with its rivals and it may take some time for it to close the gap, the 5% dividend yield offered by Citi appears to be well covered by its cash flows. While lower-risk investment options such as money-market funds or short-term Treasury bills may offer similar returns, they are unlikely to match the profitability potential of Citi if investors exercise patience and wait for the bank’s turnaround to materialize.

You may also like

Leave a Comment