Citi’s Stock Never Sleeps?

02/11/2008 12:00 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investor’s World, says the worst of Citigroup’s problems are behind it and he thinks it can bounce back strongly in 2008.

Citigroup (NYSE: C) is the premier international consumer bank, with strong retail banking operations in literally every corner of the world. Citigroup reported a fourth-quarter loss, as expected. But the pessimists weren’t satisfied; they still talk about more bad news coming. They focus on US consumer credit loan-loss reserves. Citigroup raised the loan-loss reserve for consumer credit to $3.31 billion.

Pessimists argue that this increase indicates a broad-based deterioration in consumer credit. However, other news indicates that Citigroup is being conservative in making this move. For instance, GMAC says that delinquent car loans are up only slightly from a year ago. That certainly does not support the pessimists’ argument about a broad-based deterioration in consumer credit.

Citigroup’s quarterly loss of $1.99 a share was its first loss since 1998 and [its] largest ever. Citigroup also cut the dividend to 32 cents per share per quarter, or 4.8% per year. Cutting the dividend saves Citigroup $4.4 billion this year. Add in the $12.5 billion in new capital that is being raised, and Citigroup is well-capitalized and prepared to deal with subprime mortgage issues. Contrary to what some analysts say, I believe this was the “kitchen sink” quarter. The new chief executive officer [Vikram Pandit] want­ed to wipe the slate clean going into 2008.

The bank’s $18.2-billion writedown of subprime securities assumes that every loan in that portfolio will default and the recovery will be only 50% of principal. So far, there has been very little credit deterioration in the underlying mortgages. That may get worse, but it is not likely to come even close to the 50% write-down.

I found it very interesting when Citigroup’s chief financial officer said again that the mortgages underlying the securities that are being written down are still generating significant cash flows. Write-downs are far different from write-offs. Banks only write off actual loan losses. When Citigroup writes down the value of its mortgage-backed securities holdings, it is marking to market. If the cash flows from these securities continue, then the market value of these securities will rise. What has been written down today can be written up tomorrow.

I still am of the opinion that there is much more fear than reality in today’s market for mortgage-backed securities. If I am right, Citigroup’s stock will recover strongly. In addition, Citigroup reported strong fourth-quarter results from international consumer operations and wealth management. Citigroup has the biggest and best global consumer banking operation, which has the potential to improve future earnings much faster than Wall Street expects. Global operations also generate a lot of cash. Citigroup is a Buy. (It closed at around $26 Friday—Editor,)

(Editor’s Note: John Dessauer recommended Citigroup stock throughout 2007.)

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