For years Citigroup has been one of the most hated stocks in the market, and being honest, much of that derision was well earned. But has something changed?

In the past few decades Citi has suffered from a seemingly continual stream of unforced errors. Currently they are under a consent order related to their risk management and internal controls and they are paying expenses through the nose to address these concerns. Any articles about the company on sites such as SeekingAlpha come with a barrage of comments mocking the company’s past failures and questioning why anyone would touch it as an investment after many were wiped out owning its shares during The Great Recession.

In Steps Jane Fraser as CEO

For decades, Citigroup has suffered from a lack of clear strategy or direction. A fundamental shift in the business occurred the day that Jane Fraser took over. Lots of CEOs talk a big game, make nice slide decks and talk about the future and how great it will be. But there is a big difference between management and GREAT management.

It takes a very unique sort of individual to admit when a business needs to get smaller. Many CEOs are obsessed with empire building and expanding businesses, but the truth is that sometimes the correct plan is to exit bad verticals and get smaller and have a clear focus. These are hard decisions to make, and most mediocre CEOs are unwilling to make drastic changes. Most are there to collect obscene pay for a few years and move on.

Immediately upon starting, Jane began work selling off not just struggling consumer banking units, but effectively all consumer banking units at Citi outside the USA. This is now a well known topic for bank leadership. It is extremely hard to succeed efficiently in retail banking outside your own country. Instead of allowing mediocrity to continue, these business have been sold rapidly, one after the other, freeing up valuable capital and leaving a more focused and nimble bank.

Fundamentally this is the most profound and important recent change at the bank.

Post GFC Banks

Beyond leadership, I believe there still exists fundamental misunderstanding of the large US banks since the end of the great financial crisis. Many investors (especially those who don’t follow closely) still see these businesses as extremely reckless, levered high risk operations just waiting for the next 2008 to come.

Truthfully, the huge amounts of regulatory oversight and changes that occurred post GFC have largely neutered banks. Systematically important banks are subject to extremely onerous and robust regulation and risk monitoring. They were forced to wind down or sell risky units and in my view are becoming more and more like utilities.

As part of the annual CCAR (Comprehensive Captial Analysis & Review) large banks are required to simulate and prove to regulators that even in very extreme scenarios they would have sufficient loss absorbing capacity to protect the financial system. This includes strict regulatory minimums on Tier-1 capital levels. Banks are mandated to operate conservatively through this regulatory process.

Additionally banks are also required each quarter to book CECL (Current Expected Credit Loss) provisions each quarter in which they must immediately reflect any and all future expected credit losses as an expense on the income statement for the current quarter. Wondering why bank EPS are so volatile lately? This is why.

The robustness of banks (including Citigroup) is further demonstrated by their continued profitability at historically unprecedented low interest rates for years. Finally after years of (frankly reckless) monetary policy, rates are moving back to reality. This isn’t as large a factor for Citi as a money center bank but makes a big difference for the likes of Bank of America with its robust deposit base.

In terms of credit, many view Citi as risky due to it’s international exposure which is of course somewhat true and makes it unique among American Banks. However it should be noted (as they highlight on every earnings call), most of their credit relates to multinational companies who operate internationally. I think this risk is somewhat overweighted by many investors.

That being said, there are of course very real and tangible risks unique to Citi. It is more exposed to international business and credit cards, and so these factors must be weighed when considering the stock.

Ok, So What’s the Catalyst?

Before I get into what I think the catalyst here is, let me be clear: there is a reason Citigroup currently trades where it does. Citi trades well below its Tangible Book Value Per Share of $81.65 as of December 31st. The company’s Return on Tangible Common Equity (RoTCE) is much lower than a lot of it’s peers. And so the discount to Book Value is not unjustified.

Capital Levels

As of December 31st Citi announced they had hit their target Tier-1 capital level of 13% which is a key accomplishment. This is the level of capital where Citi would be able to begin repurchasing its own shares, which (as you can imagine) is unbelievably accretive when your stock is trading at 63% of Tangible Book Value.

Every share repurchased is immediately increases book value, and reduces the amount of capital used in dividend payments.

Investors were disappointed to learn that Citi is not yet buying back shares. The issue stems from its (hopefully) upcoming sale of Citibanamex. This sale which is speculated to bring in anywhere from $7-12B (I’m guessing on the lower end) results in some temporary reductions in Tier-1 capital due to accounting stupidity that will reverse out if the deal closes later on. But alas, they are not yet able to buy back shares. It’s still possible the Citibanamex sale does not occur as expected, but if it does Citi will have a huge amount of capital to deal with very shortly.

Expense Right-Sizing and (hopefully) Efficiency Gains

Citibank is currently spending way above trend in order to address its Consent Decree related to risk management systems. In theory these expenses should right-size over the next few years leading to increased profitability and RoTCE all else equal.

Additionally, Citigroup has sold many consumer banking franchises and as these businesses complete separate in the coming years, efficiency of the overall organization should increase as its capital allocation becomes more efficient.

Treasury and Trade Solutions (TTS)

TTS is considered the crown jewel of Citi by many. As I’m not intimately familiar with TTS on its own I’ll leave that for you to read more on. Suffice to say that Citi’s unique capabilities to move money around a massive number of nations for Multinational companies is a unique and valuable toolset.

The business has been growing significantly and I’ve read opinions that TTS alone could be worth more than the entire Market Cap of Citibank currently. I don’t know enough to agree or disagree but the business is exciting.

Improvements in Investment Banking

Obviously it’s been a rough go for certain business with overnight rates skyrocketing over the past year. When the dust settles, investment banking deals should return at some point helping the bottom line.

Final Thoughts

When a business with a cheap valuation (~0.6 TBV), consistent profitability, moat and exciting growth (TTS) gets new leadership (Jane Fraser) who is focused, effective and works with urgency I take note.

I think the current valuation, prospect of upcoming accretive share buybacks and capital return as well as potential for efficiency gains over the coming years makes this a compelling opportunity for my portfolio. I currently own the stock with the intention to hold long term.

Disclaimer

Please note, the above commentary relates to my personal portfolio and is not to be considered investment advice. You should consult an appropriate professional when making financial decisions and not strangers (like me) on the internet.