- Citi stock continues to trade below its peer group based on book value.
- Citi's recent sales have led to improvements in ROE.
- A break up of Citi may result in trading valuations closer to peers, leading to nice upside.
Citigroup (NYSE:C) has continued to pay the price for the sins of the financial crisis. Last week, it was announced that Citi was being sued over alleged mishandling of mortgage underwriting from 2004-07. Then there are other litigations for major banks including Citi. In addition to this, the bank has been trying to downsize and decrease leverage by selling different businesses it does not find core to Citigroup. Should shareholders, however, demand an accelerated downsizing by breaking Citi up into multiple publicly held banks?
To grasp this concept, we must bring other S&P 500 banks (as defined by GICS) into the conversation. First, Citi is one of four large banks, Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC) in the S&P 500, ranking fourth among those peers. Compared by equity, Citi is third with $222 billion, which is $30 billion more than Wells Fargo.
One indicator to highlight the discrepancy is the price to book value. Citi currently trades at a price to book value ratio of 0.73. It is just over half of Wells Fargo (1.50) and the lowest among its fifteen peers in the S&P 500. This trend for Citi is nothing new as the bank had a price to book ratio of 0.76 a year ago based on a share price less than 0.5% lower than Friday’s close. This indicates that Citi’s book value is growing at a faster pace than its market capitalization.
An additional statistic that may be enhanced by a break up is the return on equity. While Citi has improved its ROE over the last three quarters, it is third to last among its peer group at 5.86% on a twelve month basis. A break up could allow more parts of the bank to come under the microscope and either be improved (from an efficiency standpoint), sold, or wound down.
If a comparable valuation case is to be made within the peer group, it would at People’s United Bank. The company has a lower ROE, but trades above book value. Part of this, however, is because it has the highest yielding dividend among the peer group. By splitting Citi and getting a P/B ratio closer to PBCT, investors could see an appreciation of 40%.
There are several questions that remain if Citi were to go forward with splitting the bank. The foremost would be the structure of the individual entities. Does Citi split by geographical location? Do they split based on function (investment banking, consumer banking, etc)? Do they attempt to find a hybrid approach? These are all great questions regarding the future of Citi, but perhaps the greatest of all is how long shareholders are going to tolerate such low valuations before seeking new strategic alternatives.
All data in this article is managed from internal spreadsheets and compiled as of market close November 27, 2015.