Sunday, January 01, 2006

Citibank (C) Analysis

Citi is a large capitalization stock with a capitalization of 245 billion and almost 1.5 trillion dollars worth of assets under management. The stock has a P/E of 11 and a dividend yield of 3.6%. The stock price has fallen from a peak of almost 60 dollars from a couple of years. The questions are is Citi poised for a rebound and is it worth investing in 2006?

We will analyze Citi's balance sheet in two steps. First we will look at the dividends and then apply the dividend discount model to it. We also apply streetmoney's calculator for Citi. In the second step we will look into Citi's latest quarter results and analyze the trends.

Using a dividend discount model, a constant dividend growth rate of 10% and a discount rate of 8% for a period of ten years, we get an estimated stock price of $22.00. Using Smartmoney's pricecheck calculator (link ), we get an estimate of $70=00 in five years. This gives a compound growth rate of 7.8%/annum for Citi stock excluding dividends.

There are a couple of factors that play against the Smartmoney calculator. The first one is the law of large numbers. At this growth rate, in five years the market capitalization of Citi would be 350 billion dollars assuming organic growth without further acquisitions or stock dilution. If there are acquisitions, the market cap may be reached more quickly but the shareholders are unlikely to see any price appreciation in the stock.

Let us take a look at the latest quarter from Citi and look at the trends. On the positive note, Citi bought back 124 million shares at a cost of 5.5 billion from the open market. Management mentions that the increased filing for bankruptcy given the new law and Hurricane Katrina affected the quarter compared to the prior year. Bank of America was unaffected by these events primarily because of the low exposure it has for the credit card business.

In the global consumer business segment, Citi increased revenues by 4% year over year. Citi is expanding its presence in this segment by acquiring several banks within the U.S. One of the potential risk factors for Citi is it exposure to mortgage business. Citi has a huge exposure in this segment through the acquisition of PRMI which has a servicing portfolio of 115 billion.

In the card business, the revenues remained flat and the expenses went down by 1%. The income from the card business was lower than expected because of the bankruptcy law.

In consumer finance, revenues remained flat while operating expenses jumped by 8%. In the retail banking sector, revenues increased by 9% while operating expenses increased by 3%. Corporate and investment banking is one area where Citi did well where revenues increased by 35%. However, the operating expenses in this category also increased by 26%, a significant increase compared to other areas. Capital Markets and Banking sector also increased its revenues by 39% and transaction services by 19%. In global wealth management, the expenses increased faster than revenues causing a decrease in income year over year. The Smith Barney unit contributed 13% growth in overall revenue. There was also a one time gain by discontinued operations of about 2 billion dollars after tax.

Income from continued operations declined slightly in the September 05 quarter compared to the year ago quarter. Although the revenues increased by about 9.5%, the expenses increased faster than revenue. The decrease in the overall number of shares outstanding because of share buy backs helped increase the per share revenue by one cent for this quarter excluding one time gains. Overall, the stockholders equity increased by only 2% year over year.

From the balance sheets, overall capitalization and the dividend discount model, Bank of America looks better than Citi at the moment. It is also likely that the dividend growth won't keep on increasing the way they have in the past and are likely slow down over the next few years. Things could change over the course of the coming year where Citi can get some of its expenses under control and might be able to expand in the U.S and abroad more forcefully.

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