Citigroup Inc. (NYSE:C) closed above $39 per share on December 17th, the first time it had done so since July 2011. The stock is up 51% in the last year, and over 30% year to date. There’s a case to be made that it’s still undervalued: the P/B ratio is 0.6, showing that the stock is trading at a large discount to the book value of Citi’s equity. Of course, Citigroup Inc. is not known as a particularly safe or reliable bank for investors, but even a moderate discount to book value would still leave it with a substantial upside. Wall Street analyst estimates imply a forward P/E multiple of 8 and a five-year PEG ratio of 0.8; again, we wouldn’t take that at face value, but it leaves significant room for the bank to underperform and still be a good value at current prices. In addition, three different insiders bought shares of Citi in November (see a history of insider buying at Citigroup); consensus insider buying, on average, is a bullish sign for a stock (read more about studies on consensus insider purchases).
The bank’s business has not been doing well recently, however. Revenues were down sharply in the third quarter of the year from their levels in Q3 2011, led by a decline in non-interest revenue; however, net interest revenue was also down slightly. With operating expenses showing little change, Citigroup reported about $470 million in net income as opposed to $3.8 billion a year earlier.
Citigroup Inc. had made our list of the most popular stocks among hedge funds for the third quarter of 2012 (see the full rankings), with 93 funds and other notable investors in our database of 13F filings reporting a position. It was also the second most popular financial stock, finishing behind only hot value play AIG. Billionaire David Tepper’s Appaloosa Management increased its holdings by 10% to a total of just over 10 million shares, making Citi one of its top five 13F holdings (find more of Tepper’s favorite stocks). Moore Global, managed by fellow billionaire Louis Bacon, initiated a position of 5.3 million shares during the third quarter (check out Bacon’s stock picks).
Two other large banks trading at a discount to book value are Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). Bank of America is actually cheaper in these terms, with a P/B ratio of 0.5, but it is doing poorly at getting returns on those assets (revenue and earnings were down sharply there as well in the third quarter) and so its forward P/E is 11. We think that we would avoid it. JPMorgan Chase is a more across-the-board value stock, with a P/B of 0.9 and a forward P/E multiple of 8, and can actually point to a 34% increase in net income in its most recent quarter compared to the same period in the previous year.
We can also compare Citi to Wells Fargo & Company (NYSE:WFC) and HSBC Holdings plc (NYSE:HBC). These banks share a P/B ratio of 1.2, representing a premium on the book value of their equity. In Wells Fargo’s case, this makes some sense; it is well known as a safer and more conservative bank, its business has been doing well recently, and in terms of forward earnings estimates it actually looks like a good value at 9 times consensus earnings for 2013. It’s more expensive than Citi, and even JPM, but it might merit that pricing. HSBC, meanwhile, is in the category of banks which reported double-digit percentage declines in revenue and earnings last quarter versus a year earlier. It’s apparently a very efficient bank, as its market cap and forward earnings estimates imply a forward P/E of 8, but we don’t think that we would buy it.
Citigroup certainly doesn’t look like that bad a value at this time. However, we think that investors looking to go long large banks should also consider JPMorgan Chase and Wells Fargo. The latter of these is almost certainly a safer investment, regardless of price to book ratios, and in terms of earnings it’s not particularly expensive. JPMorgan Chase seems to occupy a middle ground- posting a good value case, but also with a growing rather than shrinking business.
