I am bullish on ‘Citi’. Their TBV is $81.65, Friday’s close is $50.95, is .625% of TBV. This is market is discounting $60 B in book value. Citi is profitable, and they are simplifying their business. Currently their expenses are on the higher end due to investments in compliance, modernization and new staff hiring going for few quarters. Separately they were also building up their reserves (some of it is mandated by Federal Reserve and some are preparing for the economic slowdown, mild recession). There are scenarios where they could be earning between $8 to $10 per share and TBV over $90. Starting 3rd quarter they may be able to resume buyback and in the mean time they are paying $2.04 annual dividend. Buyback below TBV would only push the TBV higher!!!
Here is a really long-term covered call strategy. Buy the stock and sell Jan 2025 $50 call for a premium of $8.4. The net price is $42.55 and assuming it is not getting called before expiration, you can collect 7 dividends totaling $3.57; Giving you annualized return of 13.27% or simple return of 25.88%.
For some reason the stock is not called you own the stock @$39 with a TBV over $90. Will you do it?
Why buybacks matter to Citi, in the last 10 years they have bought back 1.1 billion shares, yeap that is BILLION Before this call expiration date, there is a possibility they can buyback another 300 to 400 million shares.
On buybacks, is 300~400 million buyback realistic? Citi plans to sell its Mexico unit, which will have an impact on their CET1 ratio and hence they are not planning to do much buyback this year. However, in 2024 they may have as much as $15 ~ $20 B buyback capacity, assuming today’s share price, they can easily do 300 to 400 million buyback. Buyback is going to be important for Citi, because not only it boosts TBV but will help them drive ROTCE. Citi’s ROTCE (current quarter) is around 9% compare this with JPM, BACK (15%, 14%) range and Citi’s own target of 12%. Separately they can achieve this also by reducing expenses, so far (including 2023 guidance) the expense are growing faster than revenue, so this needs to be seen whether they can meaningfully reduce expenses.
Separately, this is the reason I went with 2025 expiration, as I expect the stock will not be significantly move up until they can start buybacks, complete transformation (sell all the units they have identified), show improvement in expenses and improve ROTCE to at least to 10%.
My understanding of covered calls is that they are a good strategy to use when you believe a stock price won’t move much during the life of the option. It is usually used to generate extra income when you don’t expect much price appreciation.
If you believe C is a deeply undervalued turnaround stock why give up significant upside for a modest total return over the next 2 years? Buying deep in the money calls may be a better strategy, as it gives you leverage over holding stock, at the cost of the lost dividends and higher basis.
If you have faith that current management will finally fix this historically horribly managed company then C could be a big winner over the next decade like BAC has been under Moynihan.
See my subsequent posts, where I can added more commentary.
While the stock is deep value, sometimes deep value are for a reason. The biggest reason is can the management get the ROTCE to double digit? There are bears who think, it may not be possible and actually expect ROTCE to go down from here to 7%. In my various scenario probability, I assign this to 20%. Separately, I am/was bullish on Citi for some time/ years and I made money on options and opportunistically getting out of the stock at $70+. The core position I established at $35 hasn’t done much outside of dividends. Citi has not demonstrated they can execute consistently and there are no more “shoes” to drop. This covered call strategy will be mildly profitable to break-even, even in the worst case scenario. You need to recover your capital, even if you cannot make return on the capital is the biggest driving factor behind 2 years and at current price.
I am writing this option strategy at where we are. If the market presents an opportunity where the stock declines to mid-40’s or low 40’s, certainly I will consider that. Last year, I have done spreads like Buy $30 and sold $40, and puts at $30, $40, $50 and covered call for $50 etc. All of which expired or closed successfully.
“expenses will need to normalize over the medium term. And we now expect to the bend the curve on expenses towards the end of 2024 …
The three main drivers of the necessary expense reduction will be benefits from the exits, which will be included in Legacy Franchises, the benefits from our investments in Transformation and controls, and the simplification of the organizational structure. First, let me remind you that at this point, the ongoing expenses in Legacy Franchises are approximately $7 billion. Of the $7 billion, roughly $4 billion is transferred to the buyer upon closing or through a transition services agreement that typically lasts about a year. The remaining $3 billion relates to potentially stranded costs and the wind downs, which takes time to eliminate. Second, as our investments in Transformation and control initiatives mature, we expect to realize efficiencies as those programs transition from manually intensive processes to technology-enabled ones. And finally, we remain focused on simplifying the organization and we expect to generate further opportunities for expense reductions in the future. From a credit perspective, we still expect net credit losses to continue to normalize and any future ACL builds or releases will be a function of macro assumptions and volumes. So, to wrap up, while the world has changed significantly and the components have shifted, we remain on our path to achieve the 11-12% RoTCE in the medium term and Jane, the rest of the firm, and I are prepared to continue to show proof points along the way and demonstrate our progress.”
So they are not expecting the trajectory of expenses to change until the end of 2024. Whether Citi can successfully reduce the expenses and drive ROTCE needs to be seen. Their IT adoption, and subsequent elimination of manual processes and elimination of jobs/ roles are going to drive that.
While expenses will take end of 2024, but in 2 quarters they can start buyback. There are various factors at play. Hence the 2025 covered call.
PS: Separately, I may make this post as on-going to journal for my thoughts on Citi.
yesterday Credit Suisse raised deposit rates. Ignore the headlines, the real reason is there is a bank run going on at CS and they have to raise rates so high to keep the deposits.
Separately, while 2022 was a great year for the banks to benefit from raising rates (because their customer deposits were paying still .01% and their deposits at FED is earning 3%, 4%), so their NII moved higher. Of course everything comes back home to roost, so, banks have to raise deposit rates, and deal with smart customers moving their money out of the bank ( Yeah, I am talking about folks like me )
What banks gently call it as rates normalizing, or reversion to mean. While 2023 may be somewhat mixed bag, if Fed keeps higher for longer than expect bank earnings to go down!!!
Silicon valley bank stock down 50% because, they decided to pro-actively (?!) restructure their AFS (available for sale) bond portfolio and did a fire sale of $21 B portfolio with 1.8% yield with little less than 4 year duration and incurrent $1.8 B loss. In my earlier post, I talked about Credit Suisse offering higher deposit rates. There is going to be a bank run (actually deposit run) resulting deposit costs going up. This will lead to “normalization” of NII and bring down bank earnings.
The higher for longer is going to wreck havoc on many models. Fasten your belts.
One of the potential fallout (assuming fed and government doesn’t step in by Monday morning, because clearly they didn’t want to step in on Friday and save the bank) large deposit inflow will help Citi with reducing deposit costs (or otherwise I expected their deposit costs to raise), and simultaneously regulations on big banks going up.
Some of the big banks have fallen quite a bit…In fact, Bank of America and Charles Schwab are close their 52-week lows! To me, it sounds like clear buys, although the fall can be unnerving…Schw was in 70s just a few days earlier!! and BAC bounced from $28 ish to high 30s in Feb…it did go down a bit before the SIVB news broke out, but these 2 are behemoths, and after the 2008 crisis, I dont think they will do the same mistake again.
I highly doubt these big banks have anywhere near the same issue as SIVB.
I own BAC also, I like that bank. They have invested on IT, compliance post GFC heavily, (How heavy? $40 B heavy!!) so their compliance costs are not that high and they are right now executing very well. BAC has the digital infrastructure in place and can benefit from any deposit moving out of small banks. Look, how much BAC is setup to benefit from raising rates. In % terms both C and BAC will benefit the same but on absolutely $$ terms BAC will benefit a lot
Separately, until GFC BAC was very actively buying (M&A) other banks and getting bigger and then post GFC was dealing with compliance issues. Now, they are big, growing, most of the issues are behind, and they have a significant digital platform (meaning they can start reducing branches or staff in branches or can engage more customers with the same staff). This is the same theme I have been talking for the last few years.
Lastly but not least, WEB owns 10% of BAC.
I am somewhat leaning on Citi because of its relative valuation story, Citi is trading closer to 50% of TBV, and they have met their capital ratio’s and should be in a position to start the buyback, which should at least drive the share price to $60.
Thank you. That is very insightful. Will be glued to the market eyeing the big banks.
On a spearate note, I wonder if this may cause the FED to pause…I see Ms. Yellen saying no bail out…but doubt that…and in any case, I would think that Mr. Powell and co. would NOT want to be known as the people who caused the entire banking system/ market to crash due to their inability to be flexible, when the moment called them to be so.
I am sick of this market going down and down for the last 2 years … Hopefully, this is the pivot which may cause a rally…and another wishful thinking… what if CPI cools off next week. Now, THAT would be something!!
I am not expecting a bailout of the bank. But there are efforts to sell the bank, don’t know whether that will be successful before Monday. Unfortunately the bank failed within 30 hours, so FDIC and other regulators had no chance to prepare to market the firm. So trying to sell a failed bank is difficult. Most likely assets will be disposed.
And FED is talking about protecting depositors beyond $250K limit, because of the issue I highlighted that they are now really concerned this will trigger a bank run on every small bank.
There is no systemic risk, but banking is trending towards big banks for some time. So the systemic risk is getting bigger at the top. IN other words a failure of JPM or BAC is so big, government will not allow it, and they will super regulate those banks but will bail them out if required.
Separately, there are lots of folks within banking industry talking about the mounting for now “unrealized” losses on the bond portfolio and if higher for longer continues, those losses has to be realized. If they have to realize those losses how will it impact the capital ratio’s needs to be seen. That’s why I don’t like small banks. Stay with the big.
I was hoping to get your opinion on KEY CORP bank…Seemed like a solid regional bank…and it only had 2% held-to-maturity securities, in contrast to the high 47% in SIVB and even some bigger banks.
It has a solid dividend…would greatly appreciate your thoughts. Also, how do you you analyze these stocks.
I missed out the huge profits yesterday, as I chickened out…Shame on me!! I could have bought SCHW at $45 …I guess since I had bought at $59, I just couldnt beleive it when I saw that crater to $45 just over weekend (when I actually thought the markets would have received the bail out news and fed commitment favorably…today, it seems senses have come back… regardless, I am dizzy at this roller coaster for what are supposed to be bread and butter stocks!).
Having said that, I still felt KEY stock may be offering a lot of value at this price with fat dividends to wait for the price to slowly climb…I am guessing it went down a lot in sympathy with all regional banks, but this one seems to have stood the test of time…Appreciate your input.
I have no idea about Key Corp. C, BAC or WFC, I have been investing over a decade on these names and have been reading research reports, earnings reports, presentation and 10-q’s. But that doesn’t mean I understand these banks.
These are trillion dollar corporations and you have no idea where the risk is hidden.
I have some bigger themes (like Citi discount to BV or BAC can keep increasing efficiency and WFC basically they are in FED purgatory, and have no choice but to return capital, fancy name for buyback, because they cannot expand their business, hence they have no use for additional capital) and use them on my buy/ sell decisions. I rely on position sizing rarely I go above 3%; If a position is above 3% it is because of appreciation and I am lazy to trim.
It is perfectly normal and healthy not to react. Unless you have very strong conviction or ability to deal with strong pain, during market turmoil it is best to step aside and wait for the dust to settle. Don’t beat your self.
I had 16 K by selling some previous shares (Useless garbage stocks from 2021-2022)…Today, I bought 200 shares of CITI at around $44.80 and immediately sold 1 covered calls expiring on Jan 2024 ITM $45 strike…for $5.7 ( if I had waited for half an hour, I could have got a better premium)
And sold another call expiring in Jan 2025 for $50 strike, for $6 (I have a strong feeling both will be called and so wanted to at least get a $500 profit, for holding it for 2 years)
For WFC, same thing…I bought 100 shares at 38.50 and sold a call for $40 Jan 2024, for just about$ 4.75 I think.
If they go against me, well, I screwed up again, and this is not the first time. However, I feel comfortable holding WFC and CITI forever…Perhaps they will not beat the S&P but feel they will be around for another 10 to 20 years minimum, and hopefully appreciate in price, be it in 10 years or more…while I keep collecting the modest dividends.
Don’t look at absolute $$ rather do the math in-terms of return, you are getting an annualized return of 20% or 38% absolute return. Not bad. Also, once the volatility reduces the premium will come down and if you strongly feel, you can buyback the options or roll it up. While it looks dark, I am confident both Citi and WFC will survive this and in fact, for Citi, they could just delay selling the Mexican unit and thus potentially delay any Capital ratio hit and start buyback. I don’t think they will do it, but if they want, they can easily do $5 B buyback next quarter, which is 100 M shares or 5% of share count.
Same goes for WFC, I think WFC is in regulatory purgatory, so they cannot expand the BS, and can very well do some buybacks.
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