Citigroup Ready to Right Itself
The bank is set to take advantage of new rules, regulations and reality.
Citigroup (C: NYSE)
By Singular Research ($3.77, May 20, 2009)
AS ONE OF THE most troubled banks exiting 2008, Citigroup (ticker: C) is now one of the most optimally positioned to take advantage of new rules, regulations and reality.
We are initiating coverage with a Buy rating and a 12-month price target of $7.70.
[Treasury Secretary] Tim Geithner and the Obama administration are prepared to do whatever it takes to escape today's financial quagmire. Fortunately they have moved away from all-out nationalization, and instead are focusing on ensuring that banks are well capitalized, management teams have accounting flexibility, and that stock prices are free from manipulative downward pressures (upward pressures are fine, at least for now). Though reviews have been mixed, intentions questioned, and programs criticized, all levels and branches of government are slowly but surely constructing a new environment in which banks return to prudent banking and lending practices -- a goal shared by Citigroup.
Since the fourth quarter of 2007, Citigroup has reduced headcount by 20% and overall expenses by 25%. Since the third quarter of 2007, Citigroup has trimmed its balance sheet by 23%, including a 65% decrease in collateralized debt offerings (CDOs) and subprime exposure. Adding together public, private and government-related fund raising, over the last five quarters Citigroup has raised nearly $80 billion dollars in an effort to combat a once highly leveraged and risky balance sheet. Moreover, Citigroup is raising an additional $33 billion in common equity through an already announced preferred exchange in response to the findings of the U.S. Government's Supervisory Capital Assessment Program (SCAP). The end result is a rock-solid capital structure strong enough to endure Great Depression level stress tests.
Lending was strong in the first quarter, and we expect further signs of traditional banking and correlated revenue growth in the quarters and years to come now that Citigroup has a balance sheet that can withstand increased lending activity and overall asset growth. In addition, we have experienced firsthand, Peter Lynch-esque customer service and marketing across the bank's operations, all the way down to the teller window where new products are being offered.
We are forecasting fully diluted 2009 earnings of ($0.08) per share to account for the first-quarter operating profit, first-quarter one-time items, as well as further growth and profitability for the remainder of the year. For 2010, we are issuing an earnings forecast of 25 cents to account for increasing growth expectations upon economic recovery.
We are looking for a near-term price target of $5.50 based simply on Citigroup trading at 1.0 times its tangible common book value.
Longer term, as the company executes and regains investor confidence, we are projecting a 12-month price target of $8.25 based on both historical and peer group average price-to-tangible-book multiples of 1.5 times.
-- Jonathan Hegranes"