Citigroup Inc. (NYSE:C) stock is being bought by many value investing whales, even including Warren Buffett. Although the bank has historically been at the bottom of the Big Four, Citigroup has the most attractive valuation multiples and dividend. Furthermore, the company is exiting operations in many foreign countries, which will help the bank improve U.S. operations and return on tangible equity. While the company’s investor day and exposure to Russia disappointed investors, CEO Jane Fraser is implementing promising strategies to fix both issues. With this in mind, many whales love the stock.
Value Investing Whales Are Buying Up the Stock
In recent 13F filings, investors saw multiple whales loading up on Citigroup stock. One of the most interesting positions by a whale was Warren Buffett (Berkshire Hathaway Inc. (BRK.A) (BRK.B)), who sold his shares in Wells Fargo (WFC) and started a position in Citigroup. This is surprising, because Buffett has held Wells Fargo since 1989 and has consistently spoken highly of the bank. However, Wells Fargo has been in lots of controversy in previous years including creating fake accounts, overcharging foreign exchange customers, and more. This has caused many investors, including Buffett, to question the bank’s management and exit their positions.
In the first quarter of 2022, Buffett purchased nearly $3 billion in Citigroup stock, making up about 0.81% of Berkshire Hathaway’s portfolio. It is also important to mention that Buffett owns stock in many other banks and financial firms, including Bank of America (BAC), American Express (AXP), U.S. Bancorp (USB), and more. Now the question, is why are whales buying up Citigroup stock?
Citigroup Has Attractive Multiples and a Great Dividend
The most obvious reason as to why whales are loading up on Citigroup stock is because of its valuation with its competitors. Currently, Citigroup has the lowest valuation multiples by far, and the only bank of the Big Four that has its Price/Book and Price/Tangible Book multiples under 1. Furthermore, the bank has the highest dividend yield of any of the Big Four at 3.8%.
It is important not just to look at price when buying a stock so you are not caught in a value trap. Therefore, we must look at other reasons as to why whales are currently buying Citigroup.
Citigroup is Selling Its Consumer Banking Operations Overseas
Citigroup is one of the largest international banks in the world and focuses on foreign countries much more than the other major U.S. banks. This strategy has not been very successful for the bank as it has consistently been at the bottom of the Big Four. Last year, the bank stated they plan to exit 13 retail markets outside of the U.S. and it has been pursuing this in recent times. The bank’s most recent exit is its consumer businesses in India where they were sold for about $1.6 billion to Axis Bank. In 2022, Citigroup has also exited some of its operations in Indonesia, Malaysia, Thailand, Vietnam, Taiwan, and Mexico. After all of the exits are completed, Citigroup is expected to release about $7 billion of allocated tangible common equity.
CEO Jane Fraser stated that the reasoning for this is because Citigroup never had the scale to properly compete in the markets it is leaving. The bank is now focusing heavily on wealth management due to the strong growth and attractive returns the business entails. As for consumer banking operations outside the United States, Citigroup plans to focus on Singapore, Hong Kong, the UAE, and London, which all have lots of high wealth individuals.
Investor Day Results Were Disappointing But a Bright Future is Ahead
A big reason why the stock is down about 11% since the beginning of the year is because of disappointing guidance. At CEO Fraser’s first investor day, the company set a target return on tangible common equity of 11%-12%, lower than 2021’s return of 13.4% and analyst estimates of at least 12%. Fraser even went as far to say, “It’s frankly not a surprise that we’ve been outperformed by our peers and we failed to meet the expectations of our investors.“
The bank’s main strategy for increasing value to its shareholders is improving its business mix. Currently, the bank wants to improve its target metrics for banking, markets, and personal banking while focusing on accelerated growth for services and wealth management. This lines up with the company’s current actions of shifting its consumer banking operations to high-wealth areas while still maintaining its wealth management operations in many of the countries the consumer banks are exiting.
Citigroup has a High Exposure to Russia But It Is Trying to Find an Exit
A huge reason why many investors are shying away from Citigroup is because of its large exposure to Russia. In the company’s most recent earnings report, it was stated that the current exposure is about $7.9 billion. This is very harmful to the bank because its Russian consumer banking business is being heavily affected by the strong sanctions put against Russia for invading Ukraine.
It is important to mention that Citi’s strategy to exit many consumer businesses overseas includes Russia. Currently, Citigroup is looking for a buyer of its Russian consumer business, which generated about $32 million in the first quarter, down 6% from the previous year. The most recent news about this is Expobank’s interest in making a purchase. Previously, Citigroup has stated that it has stopped soliciting new business and clients in Russia and was in “active dialog” to sell its operations.
Valuation
When using average valuation multiples of P/E, P/B, and P/TBV of Citigroup and its competitors and combining them with consensus analyst estimates for FY22, a price target of $94.73 can be calculated. This implies the stock has an upside of about 79.75%. As for analysts, the average price target currently sits at $64.94. This means the stock would have an implied upside of about 21.11%.
What Does This Mean For Investors?
Many value investing whales, including Warren Buffett, are buying up Citigroup stock despite it historically sitting at the bottom of the Big Four. This is likely because of its attractive valuation multiples and dividend which are both much better than its competitors. However, it is important to not get caught in a value trap so investors must look for other reasoning to buy the stock. In this case, whales seem to love CEO Jane Fraser’s strategy of ending the bank’s retail operations in many countries and focus heavily on wealth management to accelerate growth. Furthermore, many investors are worried about the bank’s large exposure to Russia but management appears to be finding a solution by selling its consumer businesses in the country as well. Due to all of these points and the idea that the stock is likely undervalued, I agree with the whales and believe applying a Buy rating is appropriate.
Source: seekingalpha.com