Silver Beech Capital, an investment management firm, released its third quarter 2023 investor letter, a copy of which can be downloaded here. In the first nine months of 2023, Silver Beech achieved a year-to-date net return of 12.7%, outperforming the S&P 500, which returned 10.7%, and surpassing the Russell 2000’s year-to-date returns of -0.9%. Take a moment to review the fund’s top 5 holdings to gain insights into their primary investment choices for 2023.
In its Q3 2023 investor letter, Silver Beech Capital mentioned Citigroup Inc. (NYSE:C) and explained its insights for the company. Citigroup Inc. (NYSE:C) is a New York, New York-based title investment banking company with a $79.1 billion market capitalization. Citigroup Inc. (NYSE:C) delivered a -9.75% return since the beginning of the year, while its 12-month returns are down by -9.55%. The stock closed at $41.35 per share on November 2, 2023.
Here is what Silver Beech Capital has to say about Citigroup Inc. (NYSE:C) in its Q3 2023 investor letter:
“Citigroup (“Citi”) is a large-capitalization global diversified financial services holding company that primarily serves multinational institutional and high net worth consumer clients. Citi is one of three large American banks to be designated in “bucket 3 or 4” of the “global systemically important bank” (“G-SIB”) framework by The Basel Committee on Banking Supervision. The other banks in this group are J.P. Morgan and Bank of America.
As a G-SIB, Citi is subjected to increased regulatory supervision by global bank regulators and central banks. Enhanced regulatory supervision was an important post-crisis reform to strengthen the global financial system by increasing bank capital ratios, transparency, and decreasing risk-taking. These reforms resulted in the largest G-SIBs moving away from risk-oriented banking activities such as advisory, high-yield lending, and trading, towards lower-risk activities. Indeed, Citi’s most valuable, high-growth segment, Treasury and Trade Solutions, is in lower-risk and entrenched activities such as liquidity and cash management, payments, trade solutions, and automated receivables processing. In our view, somewhat unintuitively, Citi’s increased regulatory supervision contributes to the company’s less risky banking business model, and thus its attractiveness as a downside-oriented investment opportunity.
Citi’s market perception suffers from the bank’s negative historical reputation. In 2008 during the Great Financial Crisis, Citi received the most TARP funding (the largest “bailout”) of the U.S. banks. TARP funding was provided by the U.S. government to forestall a liquidity problem that threatened to become a solvency problem. More recently, Citi mistakenly used its own capital to pay lenders when acting as Revlon’s loan agent, resulting in a $400M fine by the Federal Reserve and orders to resolve internal controls (which Citi fulfilled). Citi’s large global consumer bank was assembled by prior management in the early 2000s to attract and service high-end global consumers. Unfortunately, this pivot was costly and ill-timed in the context of increasingly complex multi-jurisdictional regulation to prevent money laundering and tax evasion. The global consumer bank has been a drag on Citi’s overall performance.
We believe the market dislikes Citi for these historical reasons and because Citi earns lower returns on equity (“ROE”) than its peers. In 2023, Citi has so far earned an ROE of ~7%, compared with peers that earn 10%+ ROEs. Recognizing that Citi is less valuable than its peers because it is a lower performance bank, we would argue that Citi’s valuation is still far too low. We believe the market is over-discounting Citi at its current valuation of ~0.48x tangible book value (“TBV”)…” (Click here to see the full text)
A group of finance professionals hard at work in an office, signifying accounts payable and accounts receivable.
Our calculations show that Citigroup Inc. (NYSE:C) failed to make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Citigroup Inc. (NYSE:C) was in 75 hedge fund portfolios at the end of the second quarter of 2023, compared to 79 funds in the previous quarter. Citigroup Inc. (NYSE:C) delivered a -10.70% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q3 2023 page.
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Disclosure: None. This article is originally published at Insider Monkey.
