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Citigroup Incorporated 4

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  • 1. Citigroup Incorporated (C) Peter So Date: 1stDecember, 2008 Consensus Estimate 10/08A 12/08E 12/09E Sector: Financials EPS -4.30 -1.06 2.22 Industry: Banks P/E N/A N/A 3.73 Current Price: $8.29 Long Term Growth Rate: 9.50 52 Wk Price Range: $35.29-$3.05 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 468,529,664 P/E (TTM) N/A 5.54 12,501.91 17.93 Beta: 1.72 P/S (TTM) 0.72 0.78 7,581.74 2.29 Market Cap ($million): $38,419.26 P/B (MRQ) 0.39 1.32 13,399.41 12.01 Shares Out (million): 5,449.5 ROA (TTM) -0.95 0.23 38.93 8.05 Inst. Hold %: 64% EBO Valuation $21.32 Div Yld: 7.70% Recommendation: Hold Total Debt/Equity: 5.94 Stop-loss Price: $7.44 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $9.95 87% 90% Investment Thesis Summary  Due to the size and importance of Citigroup in Fundamental Valuation: the worldwide financial system the rescue Bearish: EBO valuation is -$9.44 which is package was necessary to maintain confidence 213% lower than the current price. in the banking system. Relative Valuation:  The government bailout plan is not include Bullish: Compared with the main competitors, credit card business. The amount of losses as a most ratios are the second lowest that mean percentage of loans outstanding, grew by almost Citigroup is risky or undervalue. 3% to 7.3 % in 2008 Technical Analysis:  Many investors had negative expectation in Bearish/ Neutral: Citigroup had a negative Citigroup. They also think that Citigroup will linear regression. Current stock price is under the 50 continue to have problems, including more days moving average with between the Bollinger credit card defaults. bands.  Citigroup plan cut 20% of its staff. Roughly Earnings Analysis: 52,000 employees will be laid off. Bearish: Citigroup had consecutive negative earnings surprises in last two quarters with all down  The current stock price changes in high revisions. volatility. Analyst Recommendations:  Citigroup keep expanding the oversea business, Neutral: The mean rating for Citigroup particularly in emerging market, to avoid the increased slightly from 2.76 to 2.94. Analyst domestic financial problems. recommendations are clearly in the “hold” position. Institutional Ownership:  The government injected new capital into the Bearish: the Institutional Ownership dropped Citigroup and provides protection from losses 4.88%, almost treble as many sellers as buyers on a $306 billion of mortgage assets. 1
  • 2. Company Summary Citigroup was incorporated in 1988, and is a diversified financial services holding company. It provides a broad range of financial products and services to consumers and corporate customers globally. Citigroup Inc. has the world's largest financial services network. Its business covers 107 countries with approximately 12,000 offices in the world. The major regions include United States, Mexico, Europe Middle East and Africa, Japan, Asia, and Latin America. Citigroup employs around 358,000 staff in global, and more than 200 million customer accounts in 100 countries. It is the world's largest bank by revenues as of 2008.1 Citigroup is a diversified global financial institution. Citigroup was organized into three major segments: Global Consumer, Markets & Banking, and Global Wealth Management. Global Consumer is Citigroup’s largest sector bringing in 70% of 2007 total revenues that with US consumer revenues are $31,735 million and global consumer revenues are $56,984 million. This segment produces consumer finance, retail distribution, retail banking (Real-Estate Lending, Auto Loans, Student Loans), consumer Lending and credit cards. The target consumers are individual small- to medium-sized businesses; Global Consumer produces financial services across its worldwide branch network, including banking, loans, insurance, and investment services. Therefore, 40% profits of Global Consumer came from Citi Cards which is the largest issuer of credit cards in the world with 3,800-point ATM network across 45 countries.2 Markets and Banking is the most market-sensitive divisions that include "Global Capital Markets and Banking" and "Global Transaction Services." Global Capital Markets and Banking provides investment and commercial bank service, such as brokerage, advisory, foreign exchange, structured products, derivatives, loans, and equipment finance. On the other hand, Global Transaction Services offers cash-management, trade finance and securities services. In 2007, the total revenues are $10,522 million, around 12% of Citigroup's annual revenues. Global Wealth Management is divided into “Smith Barney” and “Private Bank.” Private Bank provides banking and investment services to high net worth individuals, private institutions, and law firms. On the other hand, Smith Barney is global private wealth management unit which provide brokerage and asset management services to corporations, governments and individuals in the world. It holds 9.6 million domestic client accounts and $1.562 trillion in client assets. Global Wealth Management is more sensitive to the direction and level of the equity markets. Totaled $12,986 million, 2.5%, were earned during 2007. Competition and Strategy Competition: JPMorgan Chase also is a global financial services firm. JPMorgan Chase has six different businesses: Investment Banking, Retail Financial Services, Card Services, Commercial Banking, Treasury and Securities Services, and Asset Management. JPMorgan Chase’s major business is their investment banking. The JPMorgan brand is used by the Investment Bank as well as the Asset Management, Private Banking, and Private Wealth Management divisions. They have same operation area of Citigroup’s Global Wealth Management; both of them are target on the global market. Furthermore, JPMorgan Chase acquired the largest savings and loan bank in the United States, Washington Mutual Bank, for $1.84 billion on September 25, 2008.3 Bank of America is the main competitor of Citigroup. It is a bank holding company. Bank of America is the largest bank on assets and the second largest commercial bank by deposits in U.S. Bank of America provides a diversified operation in three business areas: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. Bank of America’s Global Consumer and Small Business Banking (GCSBB) serve consumers through checking, savings, credit and debit cards, home equity lending and mortgages. GCSBB is the largest division in the company. Global Corporate and Investment Banking (GCIB) provides financial advisement, risk management, cash management and payment services. The target clients of GCIB are large international 1 en.wikipedia.org/wiki/Citigroup 2 Citigroup annual report 2007 3 www.wsj.com 2
  • 3. enterprises, governments, financial sponsors, and hedge funds. Global Wealth & Investment Management (GWIM) provides a wide offering of customized banking and investment services for individual and institutional clients, such as Premier Banking & Investments, The Private Bank, Family Wealth Advisors.etc. The company structure of Bank of America looks very similar to Citigroup. However, Bank of America is more focus on capturing market share in consumer banking in the United State. Bank of America promises 90% of revenues in domestic market and continues to buy businesses in the US.4 To compare, Citigroup prefer expand their business to the Emerging Market. Strategy Citigroup has five strategic initiatives: expand international distribution; increase U.S. distribution; transfer expertise; invest in technology and people; and allocate capital. Citigroup had large increase in international branches and consumer finance centers in 2008. Citigroup cut expenses and leaded to lower investment spending internationally. Citigroup plan cut 20% of its staff. Roughly 52,000 employees will be laid off. Therefore, Citigroup intends to reduce its residential mortgage assets in the U.S. mortgage industry in 2008. Because of subprime mortgage crisis, heavy exposure to toxic mortgages in the forms of Collateralized Debt Obligation (CDO's) which compounded by poor risk management caused Citigroup slumped into serious trouble. During 2003 to 2005, Citigroup CDO's expanded double to $20 billion. The revenue related to CDO in 2005 already had $500 million.5 The U.S. government announced an enormous bailout plan to Citigroup on 24 November 2008. The government's bailout package injected new capital into the bank to get $27 billion of preferred shares and warrants to acquire stock. The government also provides protection from losses on a $306 billion of mortgage assets. However, the government bailout plan is not include credit card business. Citigroup's North American credit card business recorded a net loss of $873 million in the third quarter. Citigroup claimed that they will not sell any operation in emerging market, and they will continue the emerging market operation to be a core business. In 2007, 45% sale came from US market. Compare with 2005, the sale in US market decreased 59%. On the other hand, the weight on Asia soared almost double to 17.1%.6 Historical Revenue and Earnings: Historical Revenue(in Millions) Historical Earnings FY 12/08 FY 12/07 FY 12/06 FY 12/08 FY 12/07 FY 12/06 1st Quarter 28,563 41,838 34,290 -$1.02 $1.02 $1.12 nd 2 Quarter 31,484 44,602 35,899 -$0.54 $1.27 $1.05 3rd Quarter 29,456 42,063 36,323 -$0.60 $0.47 $1.10 4th Quarter N/A 26,043 40,046 N/A -$1.99 $1.03 Total 89,503 154,546 146,558 -$2.16 $0.77 $4.30 msn money The Historical Revenues keep increasing form first quarter of 2006 to third quarter of 2007. The historical earning keep around 1 dollar. Since the third quarter of 2007, the EPS dropped when the subprime mortgage exposure. Then the EPS exacerbate after the credit crunch and financial crisis in 2008. Three consecutive quarters had loss in 2008. Although the third quarter of 2007revenue in also above $40 billion, the EPS already appeared a large decreasing. The sour earnings for 2008 are due to turbulence crisis and subprime meltdown, especially in financial sector. The reported EPS in 2007 was low due to poor performance in the third and fourth quarter. Compare with 2006, the EPS decreased 82% in 2007. 4 Bank of America annual report 2007 5 http://news.pchome.com.tw/finance 6 http://news.pchome.com.tw/finance 3
  • 4. I. Fundamental Valuation Home Depot PARAMETERS FY1 FY2 Ltg EPS Forecasts -1.06 2.22 9.50% Book value/share (last fye) 22.74 Discount Rate 12.65% Dividend Payout 1.40% Ratio Next Fsc Year end2008 Current Fsc Mth (1 to 12) 12 Target ROE (industry avg.) 14.49% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Long-term EPS Growth Rate (Ltg) 0.0950 0.0950 0.0950 0.0950 0.0950 Forecasted EPS -1.06 2.22 2.43 2.66 2.91 3.19 3.49 Beg. of year BV/Shr 22.740 21.695 23.884 26.281 28.905 31.779 34.926 Implied ROE 0.102 0.102 0.101 0.101 0.100 0.100 ROE (Beg. ROE, from EPS forecasts) 0.102 -0.047 0.102 0.101 0.101 0.100 0.100 0.109 0.118 0.127 0.136 0.145 Abnormal ROE (ROE-r) -0.173 -0.024 -0.025 -0.025 -0.026 -0.026 -0.026 -0.017 -0.009 0.000 0.009 0.018 growth rate for B (1-k)*(ROEt-1) 0.000 -0.046 0.101 0.100 0.100 0.099 0.099 0.099 0.108 0.116 0.125 0.134 Compounded growth 1.000 0.954 1.050 1.156 1.271 1.397 1.536 1.687 1.869 2.086 2.347 2.662 growth*AROE -0.173 -0.023 -0.026 -0.029 -0.033 -0.036 -0.041 -0.029 -0.016 0.001 0.022 0.049 required rate (r) 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 discount rate 1.127 1.269 1.430 1.610 1.814 2.044 2.302 2.593 2.921 3.291 3.707 4.176 div. payout rate (k) 0.014 Add to P/B PV(growth*AROE) -0.15 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02 -0.01 -0.01 0.00 0.01 0.01 Cum P/B 0.85 0.83 0.81 0.79 0.77 0.76 0.74 0.73 0.72 0.72 0.73 0.74 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) -0.14 -1.21 -0.14 -0.14 -0.14 -0.14 -0.14 -0.09 -0.04 0.00 0.05 0.09 Total P/B (P/B if we stop est. -0.37 this period) 0.68 0.67 0.65 0.63 0.62 0.60 0.64 0.68 0.72 0.78 0.83 Implied price -9.44 17.53 17.07 16.62 16.18 15.76 15.34 16.32 17.38 18.55 19.86 21.32 Check: Beg. BV/Shr 22.74 21.69 23.88 26.28 28.91 31.78 34.93 38.37 42.50 47.44 53.38 60.54 Inputs: 1. EPS forecasts and the long-term growth rate were taken from Reuters.com. 2. Book value per share for the 2007 ending fiscal year is 22.74= (113,598/4994.58), numbers were taken from Reuters.com. 3. Discount rate: Using the CAPM method to find out the discount rate. 20 year T-bond rate is assumed to be the risk free rate at 3.93%. 7 Expected market return is assumed at 9%. Bate of company is 1.72. Using the CAPM method: [3.93%+1.72*(9%-3.93%)], a discount rate is 12.65. 4. Dividend payout ratio was 1.40% (0.32/6% X total assets per share) obtained from Reuters.com. 5. Next fiscal year-end is 2008 6. Current fiscal month is 12, December. 7. Target ROE of 5 year average of industry is 14.49%, which was taken from Reuters.com. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $21.32, which is higher than the current price. 2. Changing the discount rate to 10.65% (-2%), the EBO valuation will increase 42% to $30.22. Changing the discount rate to 14.65% (+2%), the EBO valuation will decrease 27% to $15.49. 3. Changing the growth rate to 14.50% (+5%), the EBO valuation will increase 10% to $23.40. Changing the growth rate to 5.50% (-5%), the EBO valuation will decrease 7% to $19.91. 4. Changing the industry ROE to 11.49% (-3%), the EBO valuation will decrease 25% to $16.08. Changing the industry ROE to 17.49% (+3%), the EBO valuation will increase 27% to $27.06. 7 www.federalreserve.gov 4
  • 5. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 WFC Wells Fargo & Co 95,268.24 28.89 2.47 11.70 8.44% 1.39 2.02 18.88% 0.11 2.24 2 BAC Bank of Am erica Co 77,421.25 16.25 3.78 4.30 6.90% 0.62 0.51 16.21% 0.03 1.11 3 WB Wachovia Corp 12,209.18 5.62 2.58 2.18 8.37% 0.26 0.30 11.96% 0.03 0.43 4 JPM JPMorgan Chase & Co 114,284.80 31.66 3.64 8.70 9.00% 0.97 0.83 10.56% 0.08 1.70 c citigroup Inc 38,419.26 8.29 2.56 3.24 9.50% 0.34 0.39 14.49% 0.03 0.72 Implied Price based on: P/E PEG P/B Value P/S 1 WFC Wells Fargo & Co $29.94 $33.70 $42.94 $32.95 $25.79 2 BAC Bank of America Co $11.01 $15.15 $10.84 $9.69 $12.78 3 WB Wachovia Corp $5.58 $6.33 $6.38 $7.73 $4.95 4 JPM JPMorgan Chase & Co $22.27 $23.50 $17.64 $24.21 $19.57 High $29.94 $33.70 $42.94 $32.95 $25.79 Low $5.58 $6.33 $6.38 $7.73 $4.95 Indicator Interpretation P/E Bullish- Citigroup has the second lowest P/E in all its competitors This indicates Citigroup is a value stock. It could also indicate it is more risky or slow growing. PEG (P/E/G) Bullish- Citigroup has the second lowest PEG ratio of all its competitors. This indicates their lower price because of higher risk or undervalued. P/B Bullish- Citigroup has the second lowest P/B in its competitors. This indicates that the stock may be undervalued, riskier. Value (P/B/ROE) Bullish- Citigroup has the lowest value ratio with competitors. This could be because Citigroup is risky or is undervalued. P/S Bullish- Citigroup has the second lowest P/S ratio of all competitors. It could indicate the stock has a low profit margin, undervalued or is risky. Summary Many of the indicators are bullish. Most of the Citigroup’s ratios are the second lowest in all its competitors. Those mean Citigroup is risky or undervalue. 5
  • 6. III. Technical Analysis Chart 1: Bollinger Bands Slow Stochastics Chart 2: Exponential Moving Average (EMA) MACD 6
  • 7. Chart 3: Linear Regression Momentum cnbc.com Indicator Interpretation Bollinger Bands Neutral- Citigroup’s group stock price just rebounded from the bottom band. The gap of Bollinger Bands increased due to the current high volatility. The size of the bands seems to be neither increasing nor decreasing which is another neutral indicator. Stochastics Bullish/Neutral- %K is way above %D with an increasing gap between them. %K is close to 40 from bottom that could indicate the stock already went back to the neutral, neither oversold nor overbought. Moving Averages Bearish/Neutral- The current price is below both the 25 and 50 day moving average, however, it appears to moving back down towards both averages. Both moving average move downwards, bearish indicator. MACD Bearish – The MACD and signal line are both lee than zero which a bearish indicator. Therefore, the signal line is upward the MACD with which a bearish indicator. Regression Bearish/ Neutral- The linear regression is downward sloping. However the price is much under the linear regression. This could indicate the stock price will increase back to the line of regression. Momentum Bearish- Citigroup’s current momentum is just under 80, which is a bearish indicator. 7
  • 8. IV. Earnings Analysis Earnings Surprises Date:03/08 Date:12/07 Date:09/07 Date:06/07 Date:03/07 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate -0.96 -1.01 0.43 1.13 1.10 Actual -1.02 -1.99 0.47 1.18 1.18 Difference -0.06 -0.98 0.04 0.05 0.08 Mean Earnings Estimates Date:12/08 Date: 03/09 Date: End of Date: End of LT Growth 2008 2009 Rate Earnings 0.50 0.53 -0.74 2.56 9.50 # Estimates 13 5 10 15 2 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 12/08 0 1 0 7 Quarter ending 03/09 0 0 0 1 Year ending 12/08 0 2 0 11 Year ending 12/09 0 2 0 8 www.reuter.com Citigroup’s earnings analysis appears to be bearish. Earnings surprises for Citigroup change from outperform to underperform during last five quarters. The huge negative earnings surprise was attributed to the enormous write down of SIV on their books. Although the consecutive negative earnings in last two quarters, the gap between estimate and actual were tighter. Analysts expected Citigroup a positive EPS of $0.53 for the first quarter of 2009 and jumped to EPS $2.56 at the end of 2009 from negative EPS $0.74 in at the end of 2008 Earnings revisions over the past week have been all negative. Compare with the last 4 weeks, the revised down estimates decreased a lot in this week. Their earnings have seen 5 downward revisions over the past week and 27 downward revisions for earnings in the past four weeks. 8
  • 9. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 3 3 3 4 Outperform 3 3 4 4 Hold 5 5 5 4 Underperform 2 2 2 2 Sell 3 3 3 3 No Opinion 0 0 0 0 Mean Rating 2.94 2.94 2.88 2.76 www.reuter.com Ratings from analysts are neutral and indicate a “hold” recommendation. The analyst recommendations have remained unchanged at 2.94 in a month. The average of ranting increased consecutively from 2.76 to 2.94 in a year. Most of the analysts recommended “hold” and no change on “Sell”, “Underperform.” Only one decreased in “Buy” currently. During the financial crisis, most analysts keep close eye on it and do not recommend any “Buy” and “Sell”. 9
  • 10. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 5,450,400,668 100.00% # of Holders/Tot Shares Held 1,143 58.83% 3,395,599,616 62.30% # New Positions 87 4.48% # Closed Positions 641 32.99% # Increased Positions 447 23.01% # Decreased Positions 1,247 64.18% Beg. Total Inst. Positions 1,943 100.00% 3,661,344,464 67.18% # Net Buyers/3 Mo. Net Chg -800 26.39% -265,744,848 -4.88% www.reuter.com Citigroup’s institutional ownership is a bearish indicator with the large discrepancy between the number of buyers and sellers. There was a 4.88% movement of share ownership from institutions to individual investors. The institutional ownership decreased from 67.18% to 62.30%. Institutional ownership currently has 800 more sellers than buyers. The decreased positions are almost treble the increased positions due to the investors worried about the government bailout plan for Citigroup. 10
  • 11. VII. Piotroski Analysis A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): N/A________________ B. Piotroski Score: N/A________________ Piotroski Item Variable needed to compute Value Points 1. Positive net income TTM net income 2. Positive cash flow TTM cash flow 3. Earnings Quality 4. Decreasing Debt Debt/assets most recent ann figure Debt/assets previous ann figure 5. Increasing working capital Current ratio most recent ann figure Current ratio previous ann figure 6. Improving Productivity Asset turnover most recent ann figure Asset turnover previous ann figure 7. Growing Profitability ROA most recent ann figure ROA previous ann figure 8. Issuing Stock Shares outstanding most recent ann Shares outstanding previous ann 9. Competitive Position Gross margin most recent ann Gross margin previous ann Total N/A 11

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