Finding a Diamond in the Rough of the Financial Panic: Major Bank with 87% Upside – The Average Joe

    Finding a Diamond in the Rough of the Financial Panic: Major Bank with 87% Upside

    Victor Lei — Head of Research

    April 4, 2023

    April 4, 2023

    Today we’re back with another high-conviction pick as part of your Exit Plan. And this one is taking advantage of a special situation in the market — the recent bank panic. 

    It’s hard to miss all the headlines about the recent banking collapses:

    • Major banks going under (SVB + Signature Bank)
    • Mass panic over bank runs
    • Bank stocks getting crushed

    The contagion seems to be contained yet the stock prices of many major banks are trading like the financial system is about to collapse. That’s unlikely to be the case.

    So today, we found one of our favorite mid-cap (>$2B in market cap) plays in the financial sector and we’re going to tell you why we think this one has become even more attractive after the recent events in the banking sector. 


    • Citi is benefiting from regional bank runs as depositors transfer withdrawals from smaller banks to larger “too big to fail” banks. 
    • The bank is in the middle of a turnaround with a new CEO (since 2019) who delivers on targets/promises (hitting all March 2022 targets). 
    • The stock is at its cheapest level in nearly a decade after a string of poorly made acquisitions and mismanagement. 
    • $85 upside target (81%) for patient investors; downside target $37 (-21%) 

    Company Overview: Citigroup is a global and diversified financial services company that provides a range of services including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services, and wealth management. 

    Thesis Overview

    1/ Citi is benefiting from deposit outflows at smaller banks. Depositors who are taking money out of regional banks are taking their money to larger banks like Citi (seeing net inflows in middle market commercial banking, personal banking and wealth management). 

    2/ Citi’s core turnaround plan won’t be impacted by market uncertainty. Citi continues to be focused on its divestitures and cutting expenses, all whilst growing its profitable Treasury & Trade Solutions segment and wealth business. Progress against these goals/targets will continue to drive the narrative through 2024. 

    3/ Citi will be little impacted by potential regulations on the banking sector. 

    Stronger regulatory pressures on banks will likely hurt smaller regional banks more than large banks like Citi (globally systemically important banks, GSIB, aka way too big to fail). 

    Citi is already subject to the strictest capital and liquidity regulations (higher levels of required capital, annual stress testing, higher liquidity requirements, etc.). 

    • The whole issue around smaller banks started with liquidity issues (held-to-maturity securities with paper losses due fed rate hiking.
    • This isn’t an issue unless banks are forced to sell these securities to meet depositor withdrawals) – an event unlikely to impact Citi.

    4/ Citi’s liquidity position is solid and the banking system is in a stronger position than the markets are perceiving — versus how challenged large banks were during the great financial crisis. 

    The balance sheet is a fortress with $1.3T deposit base where ~$850B is corporate (~$700B is TTS, ~$150B Securities Services) and the remainder in personal banking and wealth management (higher net-worth customers). 

    Deposits tend to be stickier (less likely to be withdrawn) as they’re proportionately more corporate than average and they are mainly operational deposits. 

    Looking at liquidity, Citi is able to sell its investment securities if absolutely necessary. The security portfolio could fund 38% of total deposits outstanding at any given time, compared to ~31%/44%/26% at Wells Fargo (WFC), Bank of America (BAC) and JP Morgan (JPM), respectively.

    Citi continues to have less downside risk in the event of a bank run (if all these securities were to be sold), as Citi would lose 16% of its TBV, much less than 17%/31%/62% at JPM/WFC/BAC, respectively.

    Other things going for Citi:

    • Credit card growth will fuel consumer bank growth as the long term shift from cash to cards continues
    • Its investment banking and trading division continues to gain market share

    What makes Citi attractive at these levels?

    Citi is trading at its cheapest levels in close to a decade. 

    • The stock is trading close to its lowest price to tangible book value (P/TBV) in the past decade (~0.55x of ~$82). 
    • P/TBV is what you are paying for the bank’s assets net of any intangibles like goodwill. 

    Citi has historically traded at discounts to peers due to poor management and acquisitions that did not pan out.

    In 2021, Jane Fraser (previous CEO of various segments of Citi) became CEO and is turning the ship around and showing results. 

    Due to the recent banking crisis, Citi’s valuation discount has become even larger so even accounting for all the acquisitions, it still looks cheap. 

    Citi could benefit from the banking crisis — as depositors withdraw funds from smaller banks into “too big to fail banks” like Citi. 

    Citi is unlikely to fall victim to correlated deposit withdrawals and solvency risks that sunk SVB and others. 

    Still not convinced? Citi’s paper losses (from HTM, since AFS already flows through) would be ~16% of TBV compared to 31%/62%/17% at WFC/BAC/JPM, respectively.

    Upside and downside scenario 

    Downside scenario: $37

    Tighter lending and a hard-landing recession could lower interest income and cause the stock to tread lower. Further financial sector contagion or other bank runs could cause further loss in confidence, also a drag on the stock. However, deposit guarantees by the US treasury and Fed should provide some reassurance.

    Upside scenario: $85 

    Blue-sky scenario of realizing full tangible book value per share. Patient investors could see the stock rise beyond $85 as business efficiencies become more noticeable beyond 2024 and the stock re-rate closer to tangible book value over time. 

    The stock should re-rate higher in the next 12-18 months to ~$65 (or ~45% return) on the following factors: 

    • Successful sale/divestitures of unprofitable business segments. 
    • Progress shown in Q2/Q3/Q4 earnings releases and continued progress towards targets.
    • Resumption of share repurchases in Q3 2023

    Notable transactions

    Occidental Petroleum (OXY): Exploration and production company for crude oil and natural gas. In March 2023 in 8 different transactions, Warren Buffet seems to be quite bullish on this name buying ~17.4M shares (~1.04B stake) at $59-62/share, taking his total ownership of the company above 23%. Dodge & Cox (another huge value-oriented asset manager) also owns ~10%. In addition, OPEC announced a surprise million-barrel production cut lifting oil prices which will benefit the company. The stock is trading at $65/share.

    Capri Holdings (CPRI): Luxury retail apparel (Versace, Jimmy Choo and Michael Kors). John Idol the Chairman and CEO bought 240k shares in March for ~$42/share. The stock has been down ~31% since February. Michael Kors being the majority of revenue and profit contribution, disappointed in H2 2022 results as its customer base is more price sensitive compared to the other two brands. Could be interesting to see if its strategy plays out to raise brand appeal by closing down Michael Kors stores, at least the Chairman and CEO is a believer. The stock is trading $47/share.

    Stifel Financial (SF): Wealth management, investment banking and financial services. Both the CEO Ron Kruszewski, and Co-President James Zemlyak bought 20k shares each in March for $55-59/share. Not surprising given the financial sector contagion despite bank runs having no impact on this company. The stock is down from ~$68/share (~15%) in February and the executives see a discount buying opportunity given no change to business fundamentals. The stock is trading $58/share.

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