Citigroup (C), one of the world’s largest banks, with over $2.4 trillion in assets, is a recommendation in our "Buy Low Opportunities" model portfolio, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout.
The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.
Berkshire Hathaway (BRK.B) — Warren Buffet's holding company — has taken a $3 billion, or about 3.3%, stake in Citigroup, based on the recently filed 13F report. We firmly agree that the shares offer an exceptional investment opportunity.
The valuation is certainly compelling at 65% of tangible book value, even with the grinding strategic overhaul underway, compared to its peers that trade well over twice this multiple.
We note that the spread between the 90-day T-bill and the 10-year Treasury note, which approximates the drivers behind Citi’s net interest margin, is 1.93%. While among its widest in the past five years, this spread narrowed 20 basis points (there are 100 basis points in one percent).
Citigroup investors enjoy a 4.0% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program. Citi shares have about 66% upside to our $85 price target.