“For six years, the market has said Citi is worth more dead, or broken up, than alive. If management can’t forcefully rebut that notion – something it has so far been unable to do – it should start listening to its owners…
…Its shares haven’t traded above book value since September 2008. Over the past three years, the stock has also consistently traded near or below tangible book value…..the fact Citi’s current market cap is about $46 billion below its book value implies investors already assign those assets ($50 billion in deferred tax assets from crisis era losses that might be lost or substantially reduced in value during a breakup) little to no value.”, John Carney, “A Citi Divided Could Stand Taller”, Wall Street Journal
A Citi Divided Could Stand Taller
The Real Value in a Split May Be Found at Citigroup, Not at J.P. Morgan
By John Carney
Wall Street is again abuzz with the notion of breaking up a big bank—but it may be focused on the wrong one.
Goldman Sachs last week analyzed potential gains from breaking up J.P. Morgan Chase . The impetus: a recent Federal Reserve proposal to increase big-bank capital buffers that would hit J.P. Morgan hardest. Yet the market isn’t crying out for such a breakup. J.P. Morgan’s shares trade above book value, an indication its current structure isn’t viewed as destroying value. And only twice over the past 10 years have its shares traded below tangible book value.
The same can’t be said for Citigroup . Its shares haven’t traded above book value since September 2008. Over the past three years, the stock has also consistently traded near or below tangible book value.
And fourth-quarter results this week may not shrink the discount, given a Wall Street Journal report of tough trading conditions in December. A bigger test looms this spring with the release of annual Federal Reserve “stress test” results. Citi last year flunked; another stumble could lead to calls for a fundamental restructuring.
A big problem: Citi’s current structure is a bad fit for today’s regulatory environment. By many standards used by regulators to assess systemic importance, Citi sits just behind J.P. Morgan, even though it has displayed nowhere near its rival’s profit-generating ability. As a result, capital surcharges implied by the Fed’s new proposal, although less than those for J.P. Morgan, are a full percentage point higher than for Bank of America .
A Citi breakup would be attractive if it unlocks value by lowering capital requirements, allows funds to be returned to investors and frees faster-growing businesses to achieve valuations closer to those of smaller, less complex peers.
Citi theoretically could be split among its four main businesses: an investment bank catering to multinational corporate clients, a broker-dealer focused on fixed-income and currency trading, an international network of consumer banks, and a U.S. retail consumer-banking operation.
One way to view the businesses’ value is to assign them earnings multiples similar to those of smaller peers. Applying SunTrust ’s multiple of about 12.3 times to Citi’s U.S. consumer bank, for instance, would value it at around $43 billion. A similar exercise for the bank’s other pieces would imply a total value for Citi of at least about $180 billion, versus a current market value of about $160 billion.
Granted, there would be stumbling blocks. Big banks argue there are considerable operating and revenue synergies resulting from their size and scope. And Citi-specific issues raise potential hurdles.
Citi has a nearly $50 billion deferred-tax asset. A breakup would put much of that at risk since credit for past losses wouldn’t transfer to spun-off entities. Yet the fact Citi’s current market cap is about $46 billion below its book value implies investors already assign those assets little to no value.
Then there is Citi Holdings, the unit that houses noncore businesses and legacy assets it wants to sell or wind down. Although an albatross, it might not be a huge problem. Citi Holdings is no longer a basket case, and appears to be able to operate at or close to break-even. Given that, it could likely be held by the U.S. consumer bank.
And the potential for regulatory relief from a breakup would be huge. Citi’s stand-alone pieces would likely face more-favorable capital charges given reduced systemic risk. Compliance and regulatory costs would also be reduced.
And there could be further operational gains from simplification: For years, Citi has struggled to pull together its often disparate businesses and systems into a coherent whole.
For six years, the market has said Citi is worth more dead, or broken up, than alive. If management can’t forcefully rebut that notion—something it has so far been unable to do—it should start listening to its owners.