Once upon a time, Citigroup Inc (C) was the prototypical financial supermarket, but today — even amid restructuring — analysts are calling for a complete breakup of the firm to juice C stock.
Today, Keefe, Bruyette and Woods said that splitting up Citigroup would lead to a faster return of excess capital to shareholders and “unlock meaningful shareholder value — 50%-plus returns versus the current market capitalization.”
After all, the valuation of C stock makes it clear that the market isn’t buying into current conditions.
From the KBW note to clients:
“Citigroup is in the midst of a multiyear restructuring; the company has shrunk meaningfully since the financial crisis. However, Citi’s valuation remains near the lows since the financial crisis and we believe that is a reflection of investor views about the ultimate return potential of the company post restructuring.”
C stock does trade at an eye-opening discount. It trades at just 0.63 to book value with a forward price-to-earnings ratio of 7.7. For comparison, JPMorgan Chase & Co. (JPM) has a book value of 1 and a forward P/E of 9.5.
At the same time, C stock gets that depressed valuation despite forecasts that earnings per share will grow 5.4% in 2017 on 4% revenue growth. The gap between Citigroup and JPMorgan Chase is the difference between sour and sweet sentiment. On this fact alone, KBW makes a pretty good case.
C Stock Is a Buy Either Way
Furthermore, KBW expects Citigroup to build up excess capital that regulators won’t let it return to shareholders.
Here’s KBW again:
“In the company’s current form, KBW expects Citi will utilize the deferred tax asset (DTA) over time and this will create excess capital. However, KBW believes meaningful return of the excess capital will be difficult given the current and expected regulatory environment that Citigroup faces. KBW fully believes that regulators are more than comfortable having capital build at the largest banks, and adding G-SIB surcharges into the stress test process will be the next leg up in capital requirements.”
Another benefit of splitting off Citibank and other assets is that it will allow the company to “[escape] the vice that is the current regulatory environment.” It’s certainly true that Citigroup’s designation as a systemically important financial institution handcuffs management.
Selling everything but the consumer businesses and institutional client group — and further splitting into two companies known as Citi Consumer and Citi Corporate — will relieve regulatory pressure and supercharge shareholder returns. Indeed, KBW figures that Citigroup’s valuation would rise by 60% on such a restructuring.
Breakups are in fashion on Wall Street these days — see General Electric Company (GE) — and they do appear to be working. But as KBW points out, good luck getting Citigroup to listen.
Still, KBW has planted the kind of seed that could bear fruit if C stock continues to languish.
We’ve been bullish on Citigroup Inc for some time. If KBW’s breakup idea gains traction, so much the better.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
