Citigroup – Gem or Dirt?

The mighty Citigroup, or just Citibank to most of us, almost went bankrupt. Moving forward, what can we expect from Citigroup, and its CEO, Vikram Pandit?

[Photo: David Paul Ohmer]

Citibank used to be the bank where all other banks were measured up against. In Singapore, just 2 years ago, when the conversation gets to Citibank, it was described as the bank that catered to the affluent, a place where many would love to work for, and was a standard-setter in the banking industry. Even its ATMs were different from those of other banks in Singapore, using less-used and more expensive technologies such as touch-screens. Until it’s recent spectacular collapse in the current finance-driven recession, Citigroup was on a major expansion drive to take up space at every major MRT station in Singapore, half-way across the globe from its HQ in United States. So what happened?

From a lofty price of US$ 51.30 per share back in 2 Jul 2007, Citigroup has plunged steadily to just US$ 2.62 last Friday. This is a whooping drop of 94.9% across a short 2-year period, so much so that the market capitalization of Citigroup is now even lower than many of its “smaller” rivals, including DBS Bank in Singapore. (Click on chart for bigger version)

“For these investors, they would have earned a handsome gain of 157% after just 2 weeks!”

Now, when things are this bad, they can only get much worse or much better. Some investors (or are they really speculators?) decided that Citigroup is too cheap a price and bought it when it hit a low of just US$ 1.02 per share on 5 Mar 2009. For these investors, they would have earned a handsome gain of 157% after just 2 weeks! That certainly sounds very nice, but how would we know if Citigroup won’t plunge further down to just a few cents?

CashBench has not attempted to put a price onto Citigroup at this moment. However, CashBench forecasts that Citigroup will rise further for the following 4 reasons that panned out over the past few months.

1. The United States has not allowed Citigroup to fail and is unlikely to allow it to fail, moving forward. Eventhough US President Mr Obama was absolutely furious with AIG lately over the generous bonuses it gave out, the US government was not prepared to stop its support for AIG. Citigroup belongs to the same league of institutions like AIG. Instead, the US Treasury will soon announce more concrete details on how the US government intends to rid big banks like Citigroup of their “toxic assets”.

2. Citigroup is restructuring into a good bank and bad bank. The bad bank is Citi Holdings, and will give the remaining “good bank” a real chance to rise up and out of the ashes. The bad bank, with its toxic assets, can then be sold off or managed separately.

3. Citigroup CEO has agreed to be only paid US$ 1 this year with no bonuses. CEO Vikram Pandit agreed to this before the fiasco over the AIG bonuses. There is of course no absolute guarantee that Vikram Pandit will turn the bank around this year, but he will be very much motivated to do so or at least lay the foundations for recovery The “good bank, bad bank” was one step in this direction.

4. Citigroup cannot be worth less than DBS. While we need to go through the numbers to convince ourselves of this, it will be unthinkable that DBS, a mere regional bank, can be worth more than Citibank. DBS is certainly “worth more” than Citigroup at the moment, but this situation should not persist over the long term, even when Citigroup is only left with its “good bank”.

If you are less risk adverse, have the spare cash, and does not need it for at least the next 2 to 3 years, you may find a gem in Citigroup. However, be warned that financial markets and global events can unfold quickly in the opposite direction. Understand what you can afford to lose before you head to your nearest broker.