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Will Buffett's Bet on Citi (C) Drive the Stock's Market Confidence?

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Shares of Citigroup Inc. C gained 7.5% in yesterday’s trading session after Berkshire Hathaway (BRK.B), Warren Buffett’s investment giant, announced on Monday through its 13F SEC filing that it staked up 55.2 million shares of the big bank in first-quarter 2022.

The equity portfolio holding aggregates $2.95 billion and indicates a stake of 2.5% of Citigroup’s outstanding shares. This provided the much-needed boost to the company’s shares, which have been dominated by the bears in the year so far. Until the market closed on Monday, shares of this S&P 500 member had slid 21.4%.

In the year-to-date period, Citigroup’s shares dipped 15.5%, narrower than the industry’s and the S&P 500 index’s declines of 20.1% and 16.2%, respectively.

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Let’s take a look at what has attracted Berkshire’s investment in the stock and how is the banking giant poised for the future.

A Deep Value Pick

Value investment style — picking stocks with low multiples or assets trading below their intrinsic value — is a widely known investment proposition and is broadly followed by Buffett.

As for Citigroup, its low multiples suggest that the stock is trading at a significant discount.A forward price-to-tangible book (P/TB) multiple of 0.65 and forward price-to-earnings (P/E) multiple of 7.10 make it one of the biggest steals in the banking industry presently. Hence, the heavily-discounted big bank could become a deep value investment in the long term.

Generous Capital Deployment Plans

Dividend-paying stocks always attract investors as these act as a steady source of income and Citigroup’s dividends and repurchase activities might have also encouraged Buffett’s position in the company. The bank has a dividend yield (annual dividend per share/stock’s price) of 4%, higher than its industry’s average of 3.17%.

From 2017 through 2021, the company returned capital of around $77 billion to shareholders in the forms of dividends and share buybacks.

Also, Citigroup aims to use excess capital for share buybacks, similar to 2021 and the first quarter of 2022. Given that the bank is trading at a discount, repurchases grow tangible book value.

Looming Regulatory Scrutiny

Citigroup continues to encounter many investigations and lawsuits from investors and regulators. The company paid a significant amount in fines previously to federal regulators, and was issued a cease-and-desist order for lacking compliance, data and risk management controls.

In third-quarter 2021, the company submitted its remedial plans, comprising six major programs over a multi-year period, to regulators. C is expecting to increase "investment in transformation" spend to $3-$3.5 billion in 2022 from $1.7 billion reported in 2021. The investments relate to consent orders and technology upgrades, among others.

Hence, as Citigroup continues to work through its legacy legal issues, we believe that the company will witness elevated regulatory expenses and litigation provisions, which will likely hurt its financials in the near term.

Strategic Revamp to the Rescue

Citigroup is making efforts to simplify operations and reduce costs. In January 2022, the company revealed plans to exit the consumer, small business and middle-market banking operations in Mexico. This was in addition to its major strategic action announced in April 2021 to exit the consumer banking business in 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea.

Since then, the company has signed deals to sell nine consumer businesses in Australia, Indonesia, Malaysia, Philippines, Thailand, Taiwan, Vietnam, India and Bahrain. It also plans to gradually wind down its consumer banking business in South Korea. Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to fuel growth.

Citigroup anticipates the release of $12 billion (in aggregate) of allocated tangible common equity over time from such market exits. These efforts will likely help augment its profitability and efficiency over the long term.

Multi-Year Strategy to Drive Shareholder Value

At its investor day meeting earlier this March, Citigroup unveiled a mid-term strategy that underlined streamlining of operations to improve the banking mix, investment in technology to modernize the operations and boosting the company’s global presence.

The bank aims to boost its return on average tangible common shareholder equity, driven by medium-term revenue growth and improved business mix. It is targeting a return on average tangible common shareholder equity of 11-12% over the next three to five years.In the medium term, revenues are expected to grow, seeing a compound annual growth rate (CAGR) of 4-5%.The company expects to achieve a Common Equity Tier 1 ratio of 12% by 2022 end.

Parting Thoughts

While in the near term, its slow pace of transformation efforts and higher expenses might dampen investor interest in the stock, Buffett’s investment in the stock is likely to shift investors’ focus to the company’s long-term growth prospects.This should be rewarding for patient investors.

Buffett also unloaded a 3-decade-old investment in Wells Fargo & Co WFC. Nonetheless, Berkshire Hathaway’s ownership in banks like Bank of America Corporation BAC, The Bank of New York Mellon Corporation BK and U.S. Bancorp USB should be looked upon favorably by investors interested in the banking industry.

All stocks mentioned in the article carry a Zacks Rank of 3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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Bank of America Corporation (BAC) : Free Stock Analysis Report

Wells Fargo & Company (WFC) : Free Stock Analysis Report

Citigroup Inc. (C) : Free Stock Analysis Report

The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report

U.S. Bancorp (USB) : Free Stock Analysis Report

Berkshire Hathaway Inc. (BRK.B) : Free Stock Analysis Report

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