In a previous article, I talked about the top position of one of Benjamin Graham’s oldest students, Irving Kahn. As of December 2012, Kahn owned nearly 2.5 million shares in Pfizer Inc. (NYSE:PFE), accounting for 10.7% of his total portfolio. Interestingly, his second biggest position was in a banking business, and is global banking giant Citigroup Inc. (NYSE:C). Citigroup Inc. (NYSE:C) is Kahn’s second biggest position, accounting for 9.2% of his total portfolio as of December 2012.
Citigroup – global presence with the lowest yield
Citigroup Inc. (NYSE:C) is considered to be one of the biggest global diversified financial- services companies, serving governments, institutions, corporations and consumers with its variety of financial products, including consumer banking and wholesale banking. The company currently oversees approximately 200 million customer accounts worldwide in more than 160 territories. It has two main business segments: Citicorp and Citi Holdings.
In the past five years, the company has managed to consistently grow its deposits. Its deposits have risen from $774.2 billion in 2008 to more than $930.5 billion in 2012, while its long-term debt declined from $359.6 billion to $293.5 billion during the same period. Its Tier 1 common capital ratio has been strengthened significantly, from only 2.3% in 2008 to approximately 12.7% in 2012. In 2012, Citigroup Inc. (NYSE:C) generated a net interest margin of approximately 2.9%, while the 10-year U.S. treasury note stayed at an average rate of 1.8%.
With a recent share price of $42.50, Citigroup Inc. (NYSE:C) has a total market cap of nearly $129.2 billion. The market values Citigroup at around 0.7 times its book value. The bank does not pay a juicy dividend, as its current dividend yield is only 0.1%. The payout ratio is minuscule at 1.6%. Citigroup intends to buy back $1.2 billion worth of shares, generating an additional yield of only 0.85% for its shareholders.
Bank of America – A strong, well-led company, as Buffett described
While Irving Kahn likes Citigroup, another hedge fund star, Bruce Berkowitz, likes another giant bank, Bank of America Corp (NYSE:BAC). Berkowitz owns more than 100.5 million shares of the bank, accounting for as much as 16.8% of his total portfolio.
He mentioned that when he invested in Bank of America Corp (NYSE:BAC), the stock was trading for only half of its book value. As the bank’s core business was earning a 1% return on assets and a 10% return on equity, it meant that shareholders could get an annualized return of 20% when buying at half of the book value.
Trading at around $12 per share these days, Bank of America Corp (NYSE:BAC) is worth $129.3 billion based on market capitalization. With Bank of America’s equity at around $237 billion, the market values the bank at only 54% of its book value.
Further, Berkowitz thought that the bank’s earnings power had been concealed by its large loan-loss provision. At the appointed time, this loan-loss provision will be released to the company’s bottom line, pushing up Bank of America’s net profit.
Warren Buffett also thought highly of Bank of America Corp (NYSE:BAC). He commented:
“Bank of America is a strong, well-led company… I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
