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.

Essential Tips on SGS Bonds

Following the earlier post on getting more bang for your buck through SGS Bonds, what are they really, and what are the 3 key tips you must know before investing?

SGS Bonds are “Singapore Government Securities”. They are safe investments guaranteed by the Singapore government and are often compared with fixed deposits.

1. How are SGS Bonds similar to fixed deposits?

SGS Bonds are like fixed deposits because the amount invested are not returned to you until the maturity of the bond. By investing in a SGS Bond, you have effectively lent money to the Singapore government until the bond matures. Every SGS Bond has a stated maturity date. For the 3 SGS bonds below for example, the N506100E SGS bond will mature on 1 Feb 2011.

This means if you buy $5,100 worth of N506100E bonds today, you will not usually see the money again until Feb 2011. You will also not receive $5,100 exactly. Bonds are issued in $1,000 face value each. You will only receive the face value upon maturity. If you buy 5 bonds with $5,100 today, you will receive $5,000 in Feb 2011 upon maturity. The bond price you pay for will usually be different from their face value because bonds can be bought or sold on any day just like shares of listed companies. Bond prices will hence rise and fall too.

“The other similarity with fixed deposits is the assured “interest” you get … referred to as coupon…”

The other similarity with fixed deposits is the assured “interest” that you will receive, but this is referred to as coupon in SGS bonds. Using the N506100E SGS Bond as an example again, the assured coupon is 3.125% and is based on the face value of the bond. If you hold 5 of the N506100E bond, you will be guaranteed to receive $156.25 every year until the bond matures. (Calculated as follows: 0.03125 x $5000 = $156.25) Coupons are not paid all at one go but every 6 months. The exact month varies with the bond you buy, and depends on the month that the bond matures. For the N506100E SGS Bond, it’ll be February and August every year for 2 years. Each 6-month payment will therefore be $78.13 for owning 5 of the N506100E SGS bonds.

2. Where do I buy SGS Bonds?

Retail investors like you and me may be less familiar with SGS bonds because there are limited places where you can buy them. However, bonds issued by developed and stable countries are favourite investments of institutional investors and even other countries. You will have read that the Chinese government in particular holds a large amount of US Government bonds. To get your hands on some SGS Bonds that has already been auctioned and issued by the Singapore government, you can buy them online via fundsupermart.com or some stock brokers. Do note that fundsupermart.com does not sell every SGS bond, but it does have a good selection of bonds at different maturities. Alternatively, you can also bid for new issues or re-issues of SGS Bonds via a local bank’s ATM or visit one of the bank’s branches in person.

Before you buy SGS bonds from Fundsupermart or a stock broker, you must also know the difference between quoted / dirty prices and yields. The prices quoted for a bond is usually not the actual price you will pay per bond unless you buy it just after a 6-month coupon has been paid. Otherwise, the bond price will have a small amount added to the quoted price as payment for the coupon that is due to the bond seller since the last coupon-payment date. The actual price you pay for the bond is called the dirty price.

Yield is a measure of the return you get for investing in SGS bonds. For example, if you invest $1000 and get back $1100, your return will be 10%.

“Compare the yield of a bond with … fixed deposits, savings account or elsewhere. Do not use the coupon rate as the basis of comparison.”

The yield measure commonly used for bonds is “Yield to Maturity” For the N506100E bond, its yield will usually not be exactly $3.125% because the price of the bond can rise and drop from day to day as noted earlier. The yield of a bond will change as the bond price changes. As an example, the yield of the N506100E bond will drop below 3.125% when the price per bond moves above $1000. For this reason, you should compare the yield of a bond with the other rates you see from fixed deposits, savings account or elsewhere. Do not use the coupon rate as the basis of comparison. You may also want to read up more on your own for the different yield measures available, what they mean, and how they are calculated.

3. Which SGS Bonds to buy, and when should I sell them?

If you are new to bonds, you can try to buy just 1 SGS bond that will mature in 1 year to familiarise yourself with the entire process. You just need about $1000 spare cash, that will probably be within the means of many. The return you get from a 1-year SGS Bond will still be higher than most savings account rates in Singapore!

Bond Name	Yield (%)
N505100F; Coupon 2.625%; Maturity 01/04/2010	0.33
NX00100T; Coupon 4.625%; Maturity 01/07/2010	0.36
N506100E; Coupon: 3.125%; Maturity 01/02/2011	0.53
NX01100H; Coupon 3.625%; Maturity 01/07/2011	0.54
N507100A; Coupon 2.625%; Maturity 01/04/2012	0.75
NX02100S; Coupon 3.500%; Maturity 01/07/2012	0.80
N507101E; Coupon 2.500%; Maturity 01/10/2012	0.88
N508100V; Coupon 1.625%; Maturity 01/04/2013	0.95
NX03100Z; Coupon 2.250%; Maturity 01/07/2013	1.08
NX04100F; Coupon 3.625%; Maturity 01/07/2014	1.23
N708100S; Coupon 2.875%; Maturity 01/07/2015	1.52
NY01100F; Coupon 3.750%; Maturity 01/09/2016	1.76
NY03100A; Coupon 4.000%; Maturity 01/09/2018	2.06
NY05100N; Coupon 3.250%; Maturity 01/09/2020	2.47
NY07100X; Coupon 3.125%; Maturity 01/09/2022	2.70
NZ07100S; Coupon 3.500%; Maturity 01/03/2027	3.03

You should also note that the yield or return of SGS Bonds generally increases as the maturity of the bond increases. The table above is from fundsupermart.com for the SGS Bonds they do sell as of 3 Mar 2009. You notice the yield increases from 0.33% to 3.03% as the maturity of a SGS Bond gets longer. In particular, the NZ07100S SGS Bond has the longest maturity date on March 2027 with the highest yield of 3.03%.

“(Bond price) gains or losses are on top of the regular 6-month coupons you get while holding on to SGS Bonds…”

You may be thinking, buy the one with the highest yield! :P Sure, but take care here. Your yield for the NZ07100S SGS Bond is guaranteed to be 3.03% only if you do not sell the bond until it matures. If you do sell it before March 2027, your actual return will depend on the prevailing price of the SGS bond when you sell it. For example, if you paid $1005 per bond and later sell it at $998, you’ll lose $7 for every bond. On the other hand, if the bond price rises to $1010, you’ll immediately gain $5 for every bond you sold. These gains or losses are on top of the regular 6-month coupons you get while holding on to SGS Bonds. Bond prices are affected by prevailing interest rates and market forces. If you choose a SGS bond with a maturity and yield you are comfortable with, you can then hold onto your bonds until maturity and get the face value back. Otherwise you need to monitor bond prices and interest rates to be sure you don’t have to sell your bonds at a lower price.

With these CashBench tips, you now know all the key aspects of SGS Bonds to consider before investing in them. For purchases via fundsupermart, there is a 0.1% fee when bonds are sold to you, and on the 6-monthly coupons. For the nitty gritty details, refer to fundsupermart.com. You can also get daily closing prices of SGS bonds at http://www.sgs.gov.sg/, maintained by the Monetary Authority of Singapore. When you do check, note that bond prices are always quoted in $100s and not $1000s. It's just a pricing convention. If a bond is quoted at say $103.50, the quoted price per bond is actually $1035.

Finally, with the introduction of bidding for SGS bonds via ATMs from 1 Jul 2009, CashBench has a separate post on how ATM bidding works, and what are the type of bids you can submit. The post can be found here.

Disclaimer: CashBench is in no way affiliated or commissioned by Fundsupermart.com or any other financial services providers for these information on SGS Bonds.