Since March 26, shares of Citigroup (NYSE:C) have fallen 8 percent, with much coming after the U.S. Federal Reserve surprisingly rejected its capital return plan, meanwhile approving the plans of most of its peers. This naturally created some skepticism regarding the overall health of the bank. Still, at below $46.50, shares of Citigroup present a great investment opportunity.
So what does it mean when a capital return plan is rejected for “qualitative” reasons? Reportedly, this means that Citigroup has not improved fast enough for the Fed, or at least with its capital planning process. Granted, this concern is most likely connected to the company’s massive exposure to emerging markets.
With that said, Citigroup is not a growth company but rather a restructuring story, a firm that’s massive and grossly undervalued relative to its assets. In other words, it’s cheap relative to its book value, which is a common and popular way for investors to compare banks and the level of risk associated with these investments. For example, take a look at how Citigroup compares to many of its peers on a book value per share basis.
|Company||Stock Price||Book Value Per Share||Price/Book Ratio|
|Bank of America (BAC)||$16.70||$20.71||0.81|
|Wells Fargo (WFC)||$49.50||$29.50||1.68|
|Morgan Stanley (MS)||$30.40||$32.34||0.94|
Considering the fact that each of the above five companies operate in the same industry, there is a large disconnect in how each company is valued. Therefore, Citigroup did not get the 5-cent quarterly dividend and $6.4 billion buyback program that was sought, but it does get to keep its 1-cent quarterly dividend and $1.2 billion program. Also, despite it not having the greatest payout among its competitors, it does have the greatest value.
With that said, Citigroup does have its fair share of problems — such as large exposure to a volatile global economy — but in retrospect, so do all large banks. JPMorgan (NYSE:JPM) was at the center of controversy just a couple of years ago due to its trading losses, which is an investment loss in the post-recession era that Citigroup is yet to match.
Wells Fargo (NYSE:WFC) is the largest bank by market capitalization, but it is heavily reliant on the U.S. mortgage market, commanding a 22 percent market share. Therefore, it is highly exposed the volatility of rates and a Fed policy that is becoming more hands-off.
In regards to Morgan Stanley (NYSE:MS), it is likely fairly valued — not the best and not the worst, but rather somewhere in the middle. This leaves Bank of America (NYSE:BAC) and Citigroup, two banks undergoing a restructuring process to minimize risk. Yet in comparison, Citigroup and Bank of America trade at eight and 10 times earnings, respectively, further showing Citigroup’s value relative to its peers.
When all’s said and done, Citigroup has a lot to gain as an undervalued giant. Investors had every right to be discouraged following the Fed’s decision, but now the stock has reached a valuation of opportunity. Albeit in looking throughout the space, Citigroup appears to have the most upside, due to its valuation, it also has the least risk, which is something we don’t see that often.