Little Credit For Citigroup's Assets

By Ryan C. Fuhrmann | April 20, 2012 AAA

Global money center bank Citigroup (NYSE:C) started off the week on the right foot by reporting profits ahead of market expectations. It is still behind rivals in recovering from the credit crisis, but holds a collection of international assets that deserve more value than the market is currently awarding them.

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First Quarter Recap
Revenues came in at $20.2 billion, based on Citigroup's estimate of its continuing operations. This represented growth of 1% from last year's first quarter. The bank is still breaking out the results of Citi Holdings, which represents a grouping of soured loans and businesses it has been trying to get out of since the credit crisis. Citi Holdings revenues plummeted 47% to $874 million to represent only a few percent of total revenues.

The core Citicorp operations logged much steadier recurring revenue growth of 6% as respectable trends in the global consumer banking and transaction services operations offset weak results in securities and investment banking. By geography, Latin America and Asia grew robustly and offset weakness in North American and Europe. Credit losses continued to decline and fell 32% to $2.2 billion. Citicorp net income, on a recurring basis, grew 13% to $5.2 billion.

Recurring earnings were $3.4 billion, or $1.11 per share versus 95 cents as reported. This represented a modest but improving return on equity (ROE) of 6.5% off the quarter-end book value of nearly $62 per share. Tangible book value, which backs out goodwill and other intangible assets from book value, came in at nearly $51 per share.

SEE: Understanding The Income Statement

Outlook and Valuation
Analysts currently project full-year revenues just north of $80 billion for annual growth of a couple percent. They expect earnings of $4.21 per share. The current share price is right around $35 per share and puts the forward earnings multiple at only about 7.3. The price to book multiple is currently about 0.56 while price to tangible book is 0.69.

Bottom Line
Based on the P/E and book value ratios, Citigroup's valuation looks appealingly low. The average peer bank trades at a P/E of 10.5. Rivals such as U.S. Bancorp (NYSE:USB), which has experienced among the most impressive turnarounds since the financial crisis, currently trades at 11 times its earnings estimates for the full year. The industry's average price to book ratio is currently 0.7.

Citigroup's most appealing businesses reside outside of the U.S., but they aren't seen as valuable assets right now given sovereign debt worries in Europe and slowing growth in Asia. Global rivals including Santander (NYSE:STD), Credit Suisse (NYSE:CS) and Itau Unibanco (NYSE:ITUB) are currently trading toward their lows over the past year on these fears. There's a good chance that the current fears are overblown. In Citigroup's case, it will likely generate $12 billion in profits for the year, and that leaves plenty of cushion for bad loans currently held or any that will surface in the future.

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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