Citigroup’s Good News, Not so Great

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There seems to be a growing consensus on Wall Street that Citigroup’s problems are behind it. The stock has been up recently, though at $4 the company’s shares have far from rebounded. Three years ago, Citigroup’s stock fetched $50. Nonetheless, Citigroup tried to fan those good feelings yesterday with some seemingly bullish comments from its CEO Vikram Pandit. Pandit told the Financial Times and a conference of investors that the portion of Citi’s businesses that for now he considers the good stuff will produce a hefty profit in a year or so. The FT did some calculations and came up with a projected profit for Citi of $20 billion in three years. On the surface, this looks like really good news. Citi, afterall, lost $1.6 billion last year. And the FT played it big with a front page story and said this would be a big turnaournd. Actually, not really. Dive in and you will see that Pandit’s comments are not nearly as positive for Citi as they seem or as the FT reported. The Wall Street Journal today does some analysis and comes away with a similar conclusion.

Bullish remarks from Vikram Pandit a year ago helped spark the great bank stock rally of 2009. On Thursday, the Citigroup chief executive once again gave a positive outlook for his bank. But investors should think twice before using Mr. Pandit’s thesis as a reason to pile into Citi shares.

Here’s why:

First of all, Pandit’s predictions were only about a portion of Citi’s businesses, not the bank’s actual bottom line, which is sure to be much less. About a year ago, Citi began reporting its operations in two segments–stuff the bank considers good business and stuff the bank says is junk and would like to sell off. Citicorp was labeled the good stuff. Citi Holdings; the junk. Pandit in making his $20 billion prediction was only talking about the former. And the fact that a group of carefully selected businesses that you have already identified as your best assets can produce big profits is not all that surprising.

In fact, Citicorp is already turning in good numbers. Last year, Citicorp alone earned $14.8 billion. That means Pandit is predicting the division will grow its profit on average by about 8% a year for the next three years. So this isn’t a surprising turnaround, as the FT says. It is actually pretty standard growth, especially during a time when the economy is rebounding. By that estimate Citi’s shares don’t look cheap. Amazingly, at $4 Citi’s shares look fully valued. Citi has about 30 billion in shares outstanding right now. As a result, a profit of $20 billion equals only about $0.66 in earnings per share. And that’s 2012 earnings. Discount that back to today (ht Peter Eavis) and those earnings are worth about $0.50 a share. That gives the the stock at its current price a p/e ratio of 8. Compare that to Pandit’s projected growth rate, and Citi’s shares look to be priced just right.

But wait, there’s more. Remember, so far, we have just been talking about the good stuff. In fact, there is this whole other part of Citi that we are forgetting–the junky Citi Holdings. Pandit says the bank is trying to sell off all that stuff, but it may take him a while. It’s not like this is some small division of the company. Citi Holdings has $547 billion in assets, or slightly less than a third of the bank’s total assets. And for the time being that part of Citi is losing money hand over fist. In 2009, the division lost $8.2 billion, and $36 billion the year before that. That means that Citi’s total earnings in 2012 are likely to be less, potentially far less, than $20 billion. A month or so ago, Prince Al-Waleed said Pandit had a year to turnaround Citi. If 2010 is the year of Citi’s turnaround, I am not sure it has materialized yet.