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Published: April 12, 2010
It certainly looked good on paper, but
Citigroup's (NYSE: C) ambition to acquire its way to global
dominance as a one-stop shop for clients seeking banking,
insurance, investment and just about any financial advice
imaginable, has miserably failed. A corporate umbrella that
spanned Travelers (NYSE: TRV) and its famous red umbrella
logo as well as financial services organizations throughout the
world became increasingly unwieldy and almost came completely
unglued during the credit crisis.
Thankfully for existing shareholders, Citigroup has survived its
near-death experience and is in the midst of regrouping. Its
current ambition is to
downsize and "right-size" its business strategy by shedding
non-core assets to focus on those with a better mix of growth
and profit potential. This strategy is being championed by the
current helmsman, Vikram Pandit, who is also remaking the board
of directors in an attempt to move beyond the ill-fated
buyout mindset that Sandy Weill used to expand the company.
Citigroup is still in a state of flux and will continue to be
for at least the next couple of years. As a result, reported
earnings will likely be negligible for 2010 and 2011. Recent
moves have focused on jettisoning U.S.-based businesses, such as
Smith Barney and Primerica (NYSE: PRI), the last of which
announced a recent initial public offering and will let the
company sell off its remaining ownership position over time.
Most of the remaining flux will center on the Citi Holdings unit
that was set up to contain riskier assets and businesses
Citigroup considers non-core and earmarked for sale or
divestiture.
The current make-up of Citi Holdings
consists of the joint venture investment by combining Smith
Barney with Morgan Stanley's brokerage unit, North American
residential and commercial real estate loans, other auto and
personal loans that went sour and similar assets that became
illiquid as a result of the credit debacle. This unit reported
an $8.2 billion loss last year, which, though still sizeable,
was down significantly from the $36 billion loss reported in
2008. The division currently has about $550 billion in assets
yet to unwind, representing close to 30% of Citigroup's total
assets.
As Citigroup sheds its non-core holdings, the company has stuck
with building out its global presence. It recently announced
plans to focus on mobile phone transactions in India and has
focused on Singapore, Hong Kong, South Korea and parts of Latin
America to build out its credit card and consumer banking
capabilities.
The end result of this corporate makeover is that Citigroup
should end 2010 with about $1.7 trillion in assets.
Shareholder's equity should end the year at $150 billion, or
close to $5 a share in
book value. It will take at least a couple of more years for
returns on that equity (ROE)
to revert to historic levels .
A 10% ROE equates to $0.50 in earnings and a forward
price-to-earnings multiple of nine. A 15% rate implies $0.75 in
earnings, for a forward
P/E of less than six. A return to 20% like Citigroup saw in
2000 is unlikely, and it may take until 2012 or later for
returns to improve, but it isn't difficult to see Citigroup's
share price somewhere between $10 and $15 by that time. This
implies annual gains in excess of +20% during the next three to
five years.
There is still risk to any upside in Citigroup's stock as it
could prove challenging to wind down the rest of the Citi
Holding assets. Also, while Vikram Pandit is proving adept at
breaking apart Citigroup, he will eventually have to prove to
investors he is capable of shifting gears to restoring the
company to sustainable revenue and earnings growth. Ironically,
it may take a return to acquiring large international banking
rivals to make a meaningful impact on profit growth, especially
once all non-core assets are finally shed. But so far, Citigroup
is on the right track.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
