Summary
- Citi is quite often seen as a trading position and not a long-term holding.
- The current crisis may change this perception.
- The key metric to pay attention to is Citi's capital ratios.
- Citi is poised to deliver a strong Q2 in the investment bank.
- In this article, I consider the near-term outlook and risks.
Some punters on Seeking Alpha (such as my colleague Jeff Anderson) at times view Citigroup (C) as a trading stock and not as a core long-term holding. The trading strategy is to buy at a deep discount to tangible book value and sell at or slightly above tangible book. To be fair, in the last 8 years or so, that has been quite a profitable strategy. No argument there. It seems like every time the global economy sneezes, the banking industry catches a cold and Citi stock ends up with the flu!
Fortunately, it generally recovers quickly as well - we saw it in January 2016, December 2018 and most recently in the recent COVID-19 crisis.
My personal view, though, is that Citi is on the cusp of a new paradigm. It will earn its stripes navigating through this crisis and investors will reprice its cost of capital - earning it higher multiples and lower beta. It is clear that in the current regulatory framework, the risks of a large bank imploding is materially lower than pre-2008 and its business model and earnings are sustainable. It makes no sense to apply the same cost of capital like its pre-2008.
However, to reach that conclusion, Mr. Market needs to see this bank navigating successfully through a deep crisis - COVID-19 might just be that opportunity.
I intend to cover the quality and sustainability of the business model and earnings in my next article - but in this article, I want to focus on the near term outlook and risks.
