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Investment Overview for Citigroup (NYSE:C)
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Below are key drivers of Citigroup's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:
Sales & Trading
- Debt Capital Deployed: Citigroup's Institutional Clients Group grew its debt-trading capital from $394 billion at the end of 2006 to $539 billion in 2007. Following the global economic crisis, this figure fell to below $292 billion by 2011 before increasing to $321 billion in 2012. If Citigroup decides to shrink its fixed-income business in the wake of criticism related to banks' trading operations, and the actual annual decline in size of deployed debt capital is 3% for the years to come instead of the 5% growth we currently estimate, the debt portfolio would reach around $250 billion by the end of our forecast period. Should this occur there would be a downside of nearly 7% to the Trefis price estimate
- Yield on Fixed-Income Trading Securities: Citigroup's debt trading yields fell sharply from 4% in 2006 to -5.5% in 2008 before settling at levels of 3.7% by 2012. While we expect yield figures to increase to 5% in the years to come, if yields fell to around 3% over the Trefis forecast period, then there will be an 8% downside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Citigroup at the top of the company page.
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Citigroup is a leading global financial services holding company which does business in over 160 countries. The company offers consumer banking, credit cards, corporate and investment banking, securities brokerage and wealth management services to corporate, institutional, government and individual customers worldwide.
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Below are some key sources of value for Citigroup:
Sales & Trading
Citigroup earned a net interest margin (NIM) of around 4% by trading in fixed-income securities over the last two years. This was accompanied by good performance in the private wealth division due to strong relationships and network globally. In comparison, Citigroup’s NIM on deposits and consumer loans were around 3.2%. Citigroup also achieved higher operating margin of around 26% on its investment banking business as a whole compared to under 10% on its consumer banking business. As a result of these healthy yields and high operating margins the company's Sales & Trading division is the company's primary source of value according to our estimates.
Consumer Banking Assets Greater than Transaction Services & Trade Finance
Citigroup has decided to focus on its core consumer banking business after suffering severe losses during the sub-prime crisis. This move also came about due to pressure from the U.S. government, which had to bail out the company. The consumer banking business earned a net interest margin of 3.2% in 2012 on an asset base of $442 billion. In comparison, the company had assets worth $138 billion in its Global Transaction Services business in 2012. As the company focuses more on the consumer banking business we expect solid asset growth.
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Corporate Restructuring
In the new structure, Citicorp is Citigroup's global bank for businesses and consumers. Citicorp consists of Global Transaction Services, Corporate and Investment Banking, Citi Private Bank and the Retail Bank. The Retail Bank includes regional consumer and commercial banking and card franchises around the world. Approximately two-thirds of Citicorp’s balance sheet is deposit-funded. It has relatively low-risk, high-return assets and it operates in the fastest-growing areas of the world.
Citi Holdings includes businesses that have strong market positions but are not central to the group's core operating strategy. Citi Holdings is made up of brokerage and asset management; consumer finance, mortgage loans, and private label credit cards that were severely affected by sub-prime crisis; and a special asset pool.
TARP (Troubled asset relief program) Funding
Citigroup participated in the government’s Troubled Asset Relief Program (TARP) which was designed to provide more capital to banks in light of severe losses suffered during global financial crisis of 2008-09. This was because Citi had significant exposure to the subprime mortgage industry and suffered considerable losses in 2007 and 2008 from large write-downs and write-offs on many of its mortgage-backed securities and collateralized debt obligations.
As a result, Citi received an additional investment from the U.S. government (preferred stock purchases of $45 billion) and also purchased insurance against $301 billion of assets. In 2009-2010, a portion of the U.S. investment in the form of preferred stock was converted to common equity (amounting to $25 billion) and a portion of it (amounting to $20 billion) was repaid. Citi also terminated the loss-sharing agreement.
But the bailout and the subsequent restructuring still has the following implications for Citi:
- Citigroup is going to focus on its core business of providing traditional retail and commercial banking products to its clients. It plans to cut down on proprietary trading and derivatives trading.
- Citigroup's pledge to focus on its core business will make strong profitability difficult given current market conditions. The recession has affected the bank's entire business and it remains vulnerable to major macroeconomic factors such as consumer spending, the U.S. housing market, and consumer confidence in the finance industry.
- Citigroup will continue to shrink businesses and sell assets under Citi Holdings. Considering the fact that many of these businesses have a strong position in the market they operate in, this may not necessarily be beneficial to the bank in the long run
Volcker Rule to affect proprietary trading desk
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. The rule proposed by former Federal Reserve Chairman Paul Volcker is being argued on the grounds that such speculative activity played a key role in the financial crisis of 2007–2010.
With the Volcker Rule expected to be implemented in the near future, Citigroup has already cut down on a number of its proprietary trading desks. The bank should, however, be able to maintain some of its prop trading operations as long as they are outside of the U.S.
Trefis Forecast Rationale for Investment Banking Operating Margin
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The ${forecast} represents the profit which is calculated after deducting the interest expense, non-interest expenses and provisions for credit losses associated with the division but excluding depreciation and amortization. The ${forecast} is taken the same as the operating margins for Corporate banking and securities division.
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The ${forecast}declined from 45.1% in 2005 to 33.9% in 2007 due to lower business volumes, higher non-incentive compensation staff expenses and increased costs driven by the Bisys Group Inc., Nikko Cordial, Grupo Cuscatlan, and ATD acquisitions. However, it improved from 29.3% in 2008 to 51.6% in 2010 due to headcount reduction, release of litigation reserve funds and efficient expense management. Going forward, we expect the ${forecast} to increase slightly and then remain relatively stable over our forecast period.
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Trefis considers the following in its forecast.
- Re-engineering and expense management:
- Operating expenses will benefit from continued re-engineering and expense management initiatives. The forecast is in line with Citigroup's quarterly results.
- More investments in talent and infrastructure to increase costs:
- The increase in profits for sales and trading division, improved macro-economic environment, equity market valuation, volatility and other market factors, operating expenses will increase as greater talent and infrastructure will be needed to support growth.
- Provisions for credit losses to improve:
- The provisions for credit losses had increased in 2009 due to higher credit reserve limits and net credit losses due to the deteriorating credit environment. However, 2008 and 2009 were the worst of the years due to global recession. Going forward, the recovery of global economies, improved macro-economic factors and corporate growth should reduce credit losses and provisions.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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