Citigroup Is Undervalued and Unloved

Citigroup (C) is a multinational financial services company which has been in operation for over 200 years. It is the third largest bank holding company in the U.S.A. by assets and its largest shareholders include funds from the Middle East and Singapore. The firm has the largest financial services networks in the world in a 140 country with 16,000 offices throught the world. Citi holds over 200 million customers accounts and is a primary broker for the US Treasury Department. The firm suffered heavy losses during the financial crisis which lead the Government to bail it out to the tune of $25 billion and guranted $300 billion in the firms assets. Despite these losses and bailout which gave the goverment a 37% equity interest, it still built up an enormous cash reserves of $420 billion in surplus liquid cash and government securities as of 2012.

History

1998 Merger

Citigroup was came about at of the merger between Citicorp and Travelers Group. The structure of the merger was that of a stock swap, with Travelers Group purchasing the entirety of Citicorp shares for $70 billion, and issuing 2.5 million new Citigroup shares for each Citicorp share. When the merger was completed the new company was the largest financial institution at $140 billion with $700 billion in assets.

2000 Acquisitions:

• Associates First Capital Corporation (Agreed to pay victims of predatory lending practices $240 million)
• European American Bank - $1.9 billion
• Banamex - $12.5 billion

2008 Financial Crisis and Beyond

The firms heavy exposure to troubled mortgages in the form of collateralized debt obligation (CDOs), compound by the firms very poor risk management or lack of risk management. This exposure and lack of risk management left the firm insolvent, despite its receipt of $25 billion in the Trouble Asset Relief Program Fund. As a result of its become insolvent the Citi and Federal regulators approved a plan to stablize the company. On November 24, 2008 the government announced a massive plan to save the company which called for the government to back $306 billion in loans and securities and directly invest $20 billion in the firm. Multiple government agencies would cover up to 90% of losses on its $335 billion portfolio after Citi absorbed the first $25 billion in losses. In return the Citi gave the government $27 billion in preferred shares and warrents to acquire stock. In January of 2009, the firm announced that it plan to reorganize itself into two operating units: Citicorp for its retail operations and institutional client business and Citi Holding for its brokerage and asset management. Citigroup will continue to operates as one company. Citi achieved its first profitable year since 2007 in 2010 and it reported $10.7 billion in net profits, compared to its loss of $1.9 billion in 2009. In late 2010, the government sold its remaining shares for a $12 billion profit.

On March 2012, Federal Reserve reported Citi was one of the four financial institutions out of 19 major banks to fail the stress test. According to the company and the Fed it failed the stress test because of its high return capital plan and its international loans. Again in 2014 the firm failed the stress test. According to the Fed it fail Citi on qualitative concerns that was left unresolved despite regulatory warning.

Finances

Balance Sheet

2013 31/12	2012 31/12	2011 31/12	2010 31/12
Total Current Assets	-	-	-	-
Total Assets	1880382	1864660	1873878	1913902
Cash & Due from Banks 29885 36453 28701 27972 Other Earning Assets, Total 1020950 996700 1016780 1044590 Net Loans 645824 630009 617127 608139 Property/Plant/Equipment, Total - Net - - - - Property/Plant/Equipment, Total - Gross - - - - Accumulated Depreciation, Total - - - - Goodwill, Net 25009 25673 25413 26152 Intangibles, Net 7774 7639 9169 12058 Long Term Investments - - - - Other Long Term Assets, Total - 36 - - Other Assets, Total 150940 168150 176688 194991
Total Current Liabilities	-	-	-	-
Total Liabilities	1676043	1675611	1696072	1750434
Accounts Payable 53707 57013 56696 51749 Payable/Accrued - - - - Accrued Expenses - - - - Total Deposits 968273 930560 865936 844968 Other Bearing Liabilities, Total 25000 20300 16000 28200 Total Short Term Borrowings 251456 259263 247814 258348 Current Port. of LT Debt/Capital Leases - - - - Other Current liabilities, Total - - - - Total Long Term Debt 207116 223163 312505 362983 Long Term Debt 207116 223163 312505 362983 Capital Lease Obligations - - - - Total Debt 458572 482426 560319 621331 Deferred Income Tax - - - - Minority Interest 1794 1948 1767 2321 Other Liabilities, Total 168697 183364 195354 201865
Total Equity	204339	189049	177806	163468
Redeemable Preferred Stock, Total - - - - Preferred Stock - Non Redeemable, Net 6738 2562 312 312 Common Stock, Total 31 30 29 29 Additional Paid-In Capital 107193 106391 105804 101287 Retained Earnings (Accumulated Deficit) 111168 97809 90520 79559 Treasury Stock - Common -1658 -847 -1071 -1442 ESOP Debt Guarantee - - - - Unrealized Gain (Loss) -1724 597 -35 -2395 Other Equity, Total -17409 -17493 -17753 -13882
Total Liabilities & Shareholders' Equity	1880382	1864660	1873878	1913902
Total Common Shares Outstanding	3029.24	3028.88	2923.88	2905.84
Total Preferred Shares Outstanding	-	-	0.01	0.01

Income Statements

2013 31/12	2012 31/12	2011 31/12	2010 31/12
Net Interest Income	46793	46686	47649	53539
Interest Income, Bank 62970 67298 71858 53539 Total Interest Expense 16177 20612 24209 -
Loan Loss Provision	7604	10458	11336	25809
Net Interest Income After Loan Loss Provision	39189	36228	36313	27730
Non-Interest Income, Bank	30108	27429	29682	32237
Non-Interest Expense, Bank	-49800	-55832	-51273	-46851
Net Income Before Taxes	19497	7825	14722	13116
Provision for Income Taxes	5867	7	3575	2217
Net Income After Taxes	13630	7818	11147	10899
Minority Interest	-227	-219	-148	-281
Equity In Affiliates	-	-	-	-
U.S GAAP Adjustment	-	-	-	-
Net Income Before Extraordinary Items	13403	7599	10999	10618
Total Extraordinary Items	270	-58	68	-16
Net Income	13673	7541	11067	10602
Total Adjustments to Net Income	-457	-192	-212	-99
Income Available to Common Excluding Extraordinary Items	12946	7407	10787	10519
Dilution Adjustment	1	11	17	2
Diluted Net Income	13217	7360	10872	10505
Diluted Weighted Average Shares	3041.6	3015.5	2998.8	2967.8
Diluted EPS Excluding Extraordinary Items	4.26	2.46	3.6	3.55
DPS - Common Stock Primary Issue	0.04	0.04	0.02	-
Diluted Normalized EPS	4.38	4.11	4.17	3.55

For fiscal year 2013, the firms interest income decreased 6% to $62.97 billion and net interest income after loans loss provision increased 8% to $39.19 billion. Earned $13.7 billion which was the firms largest profit since the financial crisis and it grew its loan portfolio by 6%. The firm generated $20 billion in regulatory capital, ending the year with a Tier 1 Common ratio of 10.6%.

Financial Assets and Liquidity

Ratio's	2013	2012	2011
Debt to Equity	1.37	1.54	2.13
Total Equity to Total Assets	0.11	0.10	0.10
LT Debt to Total Assets	0.12	0.13	0.17
Tier I Common	12.6%	12.7%	11.8%
Tier I Capital	13.7%	14.1%	13.6%
Dividend Payout	0.01	0.02	0.01

Valuation

Citi today sells for 11x its earnings 2.5x its free cash flow and 0.7x its book value which so that Citi is trading at lower multiples then the other big four banks in the United States. If Citi sold at the same P/E as Wells Fargo then it would sell for $60.90 per share and if it sold the same P/E as JP Morgan then it would sell for $55.25 per share. Today the firm sells for about 8.2x its pretax earnings. If Citi sold at 9x to 10x its pretax earnings then it would sell for $53.19 to $59.19 per share. From todays price to $59.19 per share is should be anyone's buying range, let me be clear I use pretax earnings must of the time to see how much I am willing to pay up for a company. I believe pay 9x to 10x a company's pretax earnings is reasonable way to invest. Now lets look at Citis free cash flow per share of $18.87 per share and it currently trades at 2.5x it free cash flow, but if it traded at Wells Fargo free cash flow multiple of 4.6x then it would sell for $86.80 per share. Based on the Firms earnings, book value, free cash flow and selling at lower multiples across the board compared to the other Big Four Institutions, I would buy the stock at today prices. It is very clear that Citi is undervalued and the share price could easily double from where it is at now.