Citigroup Break-Up Analysis – Part 2

Okay, so after looking over Citigroup (C) net income by segment over the last four years (see prior post), it’s time to make some projections about the future profitability of the company. First, I am going to do an extremely conservative valuation to try and find out what our likely downside is with the stock. Clearly, these are simply educated guesses at this point, so they could prove way off base.

Nonetheless, if I make a point to be both very conservative and realistic, it will likely be a valuable exercise. As Citigroup reports future earnings (first quarter numbers are due in April), I can see how the projections are holding up and making adjustments if needed.

Sticking with the conservative view, I am going to use a price-earnings ratio of 10x for each of Citigroup’s businesses. One can certainly argue that some divisions are worth more than that, but I’ll factor that into my more aggressive valuation model later on. For now, conservatism means 10x earnings.

As you saw from Citigroup’s historical net income data, two of the four divisions are much easier to predict than the other two. Both the international retail banking operation and the global wealth management business don’t see much volatility in earnings. Let’s project those two areas first.

International Retail Banking:

Net Income in millions of USD (2004-2007): $3880, $4098, $4017, $4193

Conservative estimate going forward: $4000

Assuming no growth, since recent years have hovered around this level

Global Wealth Management:

Net Income in millions of USD (2004-2007): $1209, $1244, $1444, $1974

Conservative estimate going forward: $2000

New assets coming in, coupled with population growth, make this area a fairly consistent grower

*The next two areas are far more volatile, but again, I’ll try and be overly conservative:

U.S. Retail Banking:

Net Income in millions of USD (2004-2007): $8010, $7173, $8390, $4108

Conservative estimate going forward: $3000

Although 2007 was really ugly, let’s assume things get worse before they get better

Corporate/Investment Banking & Alternative Investments:

Net Income in millions of USD (2004-2007): $2810, $8332, $8403, ($4581)

Conservative estimate going forward: $2000

This is the toughest to estimate. Let’s assume the structured finance boom days are over, go back to the 2004 number and slash that by another 30% or so.

Where does this leave us?

If these profit estimates are met, and Citi trades at a 10 P/E, the company is worth about $110 billion. Based on their share count of 4,995 million I get a fair value of $22 per share. The stock currently trades at $25 so we have about 10% of downside to my conservative estimates.

This is why I am starting to be intrigued by Citigroup as an investment in the mid to low 20’s. The odds of somewhat limited downside (and tremendous upside) look pretty good. In coming days I’ll post a more aggressive (but reasonable) set of assumptions so we can try and see what the upside is if Citigroup rebounds nicely in coming quarters and years.

Full Disclosure: No position in Citigroup at the time of writing

Related Posts:
Citigroup Break-Up Analysis – Part 1
Citigroup Break-Up Analysis – Part 3

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10 Thoughts on “Citigroup Break-Up Analysis – Part 2

  1. Chad, are you taking into account the debt they are adding due to current conditions. When you calculate the value per share are you including the dilution effect that the recent foreign investments will have in the next several years?

  2. Chad Brand on February 21, 2008 at 10:22 AM said:


    I used Citigroup’s year-end share count because the convertible securities they have issued are out of the money. The conversion prices are between $31 and $34 per share, so new shares won’t be issued for a long time.

    There will likely be dilution at some point (it could reduce fair value by as much as ~12%), but there is no way to quantify it at this point, as future share count reductions could net out much of the dilution over the period of many years (both buybacks and dilution aren’t likely anytime soon). Given the interest rates they got on the preferreds, investors aren’t likely to be in any hurry to convert to common shares.

  3. Anonymous on February 21, 2008 at 6:39 PM said:

    The problem with evaluating C or really any of these big banks is you don’t really know what is under the hood and how much losses they will take on. If you could just have some feel for the total extent of the write-downs and if it was a reasonable value, say $20-30 Billion, then yeah you could value Citi on earnings. However, you really don’t know what you are getting into with this and you are just taking the attitude ‘in the past banks have always worked through these problems’. Maybe the market works through this and maybe there’s a lot more pain but which one is more likely is the real question you need to ask.

    Basically, it’s not about earnings as obviously it is a steal based on earnings, it’s about whether or not Citi will survive and/or whether they will survive without massive dilution. I don’t mean to be rude but I think it all boils down to that. What you really need to analyze is the extent of Sub-prime, CDO, muni and other debt exposure and under what scenarios do they chapter 11. That is where simple analysis breaks down.

    I have always been a value investor. I have always taken the attitude, this is just temporary, just investors being afraid. I sat through massive pain in 2000-2002, didn’t sell and even kept committing more money. You get the picture. This time though, I am not sitting through it. You just don’t know what is going to happen with this debt melt down. American institutions have been taking on debt like they’d be foolish not to for the last several decades and ultimately there is a price that is going to be paid for it.

  4. Anonymous #3, what happened with your depressed 2002-2003 investments around 2005-2006?

    Didn’t they get back on track?

    Or how many country-size companies with long history and tons of actual assets went down?

    Don’t get me wrong, I don’t even argue with your point, I barely try to undertsand how much it is actually based on actual data and how much is due to induced fear (not without merits, but nonetheless fear).

    For the record, I myself get more and more convinced that playing the stock market is not much different from playing lotto.

  5. Chad Brand on February 22, 2008 at 8:19 AM said:


    Thanks for expressing the opposing bearish view on Citi (it’s one of the reasons blogs have comment sections). Some in the blogosphere are very rude when commenting, but you weren’t in attack mode, you just expressed your opinion, so don’t worry about it.

    That said, if we don’t value stocks on earnings, what do we value them on?

    I agree that if you believe Citi could file for Chapter 11 bankruptcy, then things like earnings won’t matter, but why would you think that is even a remote possibility? Please give us some data to substantiate that concern.

    With 3 out of Citi’s 4 businesses very profitable, even during a horrible year like 2007, I think the writedowns are clouding some people’s judgements of value within the other areas of the company.

    And don’t forget, these CDO writedowns are non-cash charges… they are marking them to market, but they are still cash flowing as expected. Even if they end up with actual losses in the tens of billions, it will be spread out over a number of years (providing they don’t sell them early), so they should be able to weather the storm.


    Many people equate the market with the lottery. But remember one thing, with gambling the odds are against you. With investing the odds are in your favor (a much better position to be in).

  6. Anonymous on February 22, 2008 at 8:42 PM said:

    You are correct, I am fearful. I keep hearing the mantra, fearful when others are greedy, vice versa. I have seen people say this the whole way down on stocks and it really doesn’t mean anything.

    To be fair, my analysis on C is fairly basic, just a look at the balance sheet and what I pick up through the media but I think there are some issues.

    1) Second largest derivatives exposure of any institution at $35 trillion. I will admit this one is a bit of a long-shot that it ever melts down but hey even buffet has been warning against derivatives.

    2) Look at their balance sheet. I don’t have quick access to the most recent quarter but I don’t think things have changed too much. As of september, you were balancing 2.358 trillion in assets, against 2.231 trillion in liabilities. Take out intangibles and your net assets are about 2.5% of liabilities. We haven’t even begun to get into problems with prime mortgages or credit card debt but based on their revenue figures these represent large sections of Citi’s revenue and I am thinking their ‘assets’ as well. Should their be increases in debt charge-offs, Citi could be a lost cause.

    3) Really just an extension of the last point. Nobody knows how bad this crunch will get and to what extent a recession develops but if it’s severe it could easily push Citi into a bankruptcy position at least as far as the simple assets – liabilites equations goes.

    I think the main point is you just don’t know what will happen. The fed used cheap money to get us out of the last recession and I have my doubts that this type of activity can last forever. If you want to look at it in terms of numbers then dig up the numbers on

    a) the federal debt relative to GDP, it’s currently around 70%

    b) consumer debt relative to GDP, don’t have the numbers handy but seem to recall them being at generational highs,

    c) the amount of home refinancing that was flowing into the economy the last few years, I believe it was $600 billion in 06, haven’t seen 07 yet but this number could go way down if current trends continue.

    d) US federal deficit of $500 billion projected for this year, not counting wars in Iraq and Afghanistan, ie the debt ratio’s are going to get worse.

    e) huge trade deficit on the order of $700 trillion, this is putting pressure on the dollar as buffet has been saying for years and will continue to do so, what is the impact that that will have on interest rates if foreign sovereign investment funds lose their appetite for american debt? If interest rates are forced to rise what will that do to heavily in-debted consumers and governments?

    f) Inflation in India, China, Russia. The EU concerned more about inflation than recession. How can you keep lowering interest rates if there is global inflation? If the rest of the world has inflation and the dollar is getting cheaper than america should have even higher inflation.

    So you have years and years of debt accumulation which is not slowing down by the way and now a credit crunch. Oh and a recession looming. To me it just doesn’t seem like a good buy to get into one of the more heavily leveraged banks under these conditions when it’s only down 50%.

    I know you are going to think me an alarmist but these are the facts as I see them. Like I said I have been on the value band-wagon for years and have sat through a lot but this time feels different.

  7. Anonymous on February 26, 2008 at 11:16 AM said:

    Are you going to respond to this? I thought you were trying to encourage some discussion here?

  8. Chad Brand on February 26, 2008 at 11:47 AM said:

    Sorry, didn’t get to it yet.

    Anonymous wrote:

    “Nobody knows how bad this crunch will get and to what extent a recession develops but if it’s severe it could easily push Citi into a bankruptcy position at least as far as the simple assets -liabilites equations goes.”

    Easily? How? At year-end Citigroup had $2.18T of assets and $2.07T of liabilities, so shareholder equity was $114B. How would $114B of value be wiped out for them to reach negative assets? During 2007 (a terrible year for Citi) their equity dropped from $120B to $114B. You would have to have another 19 years in a row of that level of value destruction to reach negative book value and wipe out common stockholders.

    Most of the rest of the response listed negative economic statistics. I am not arguing that the economy is in good shape, but those numbers simply indicate the banks will not be as profitable in the next few years as they were in the past few, but we already know that.

  9. Anonymous on February 26, 2008 at 5:55 PM said:

    Perhaps I was being melo-dramatic when I said it could ‘easily’ bankrupt, I just mean it is a realistic possibility. It’s hard to put a number on it but my gut says something on the order of 1 in 5. There is the more realistic possibility too that it simply gets nailed for tons of charges and has to dilute. Already, $30 Billion has been sold to outside investors. Because these are convertible shares, I don’t think they show up in the market cap numbers on yahoo.

    Also, as far as book value, you are including intangibles in your analysis. I have never lost more money than buying companies with intangibles thinking they actually had real net value. If you take out intangibles, I believe the real number, the tangible net value is closer to $60 billion. In the last quarter they received $16.5 billion of funding, so without that, their net value would have dropped even further.

    The latest news making the blogosphere, is on some of the banks exposure to VIE’s. I am including a bloomberg link to back this up
    Citi apparently has $320Billion invested in them. Up until a couple days ago nobody even had heard about them. If you are not analyzing their debt and just focusing on earnings I think you are just fooling yourself.

  10. Chad Brand on February 27, 2008 at 6:37 AM said:

    Even if you omit intangible assets it would take 10 more years like 2007 to erode tangible assets.

    I guess we’ll just have to disagree on how to approach valuing the company. I prefer to use actual numbers, not simply a “gut feeling” that they could realistically go bankrupt. Personally, I don’t think the data supports odds of anything near the 1-in-5 you postulate. The fact that they can raise capital so easily shows that the odds of a capital shortfall are remote.

    Even if you assign a value of zero to Citigroup’s corporate and investment banking division (even bankrupt it if you want), the U.S. retail, international retail, and global wealth management units are easily worth $90 billion, or about $18 per share. Even after dilution, that would come out to $16 per share.

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