Why does Citi trade at half its book value?
Citi reported a book value of stockholder's equity of ~$210 billion at 9/30/23. Meanwhile, Citi's market cap is only ~$95 billion. Thus, its market value of equity is less than half its book value of equity. I know bank stocks have been hit hard post-SVB, but it just doesn't seem to make sense.
Intuitively speaking, doesn't that imply Citi is more valuable as a liquidated entity than as an ongoing company? Investors apparently value the company at an amount that is less than its total assets minus its total liabilities. Obviously, it's more nuanced than that, but it just seems weird that a massive multinational firm with significant synergies and market share is worth less than half its book value.
Because it's a shitco
As a start, you should be subtracting out pref, goodwill/intangibles which gets you to 166bn. Then subtract out value of DTA which is another 30-35 bn, so call it 135bn.
Still leaves market cap below TCE, but it's a much more comparable number.
Then it comes down to whether the assets on the balance sheet are actually worth what the bank says they're worth and lack of transparency to what's actually there. They have a substantial amount of level 3 assets. They certainly can't be liquidated at fair value, and it's pretty hard to measure the value accurately. Any of the legacy banks will also have a substantial amount of legacy assets (e.g, data centers that are now essentially worthless given how outdated the tech is but that haven't been fully depreciated yet).
They also operate in a highly regulated environment. If you're servicing loans, you can't just close up shop and stop servicing them without someone taking over for example.
Now, if you can't actually liquidate your assets at book value, it becomes a question of whether your returns exceed your cost of equity. Fundamentally, if your RoTCE is lower than the cost of equity your investors expect, then you're going to trade below book value.
SB’d - this guy 100% gets it. There’s a reason Buffett disliked financial services companies (and maybe still does) - a lot of the assets are level 3 ie there’s no liquid market due to either their exotic nature and/or complexity. In some instances there might be only one counterparty who could pay you their fair value eg a swap facing one bank where they’d have to agree the termination value (sometimes this is straightforward if it’s a simple interest rate swap, sometimes not).
So if you were trying to shut down the bank quickly, given the limited number of buyers out there for many of these assets they would quickly “smell blood in the water” and you’d be lucky to get 50% of their fair value in a fire sale scenario.
Also as the above poster says, regulatory reasons - ie you can’t just dump portfolios of loans without tons of regulatory/legal work especially if they’re retail-facing. So all of Citi’s retail stuff would be a nightmare to sell quickly.
Finally then there’s staffing costs/issues - laying everyone off would cost a small fortune. And it wouldn’t even be practicable - as for instance many of the complex assets would have almost zero value if you fired everyone who knows how they worked. So if anything you might have to pay retention bonuses to keep staff managing various asset classes, as without them you’d have no way to even value these things (given bankers likely won’t want to hang around a place that is shutting down and thus offers no career advancement/bonuses eg with CS at the moment). It’s the reason that many banks had giant “non-core” divisions after the financial crisis - they had tons of toxic assets they wanted to sell, yet this would take years and in the meantime they needed lots of bankers knowledgeable in CDOs etc to be able to run down/sell these.
Just for reference, a firesale as described above can be seen in the movie ‘Margin Call’.
Not sure it’s true what you said about Buffett disliking financial services stocks
BAC and AmEx are 2 of his biggest holdings. He also likes insurance as a business
These are good reasons for all banks to trade poorly. Not sure if you touched on this but would also add not just credit related impairments to the balance sheet but also marks from interest rates on both loans and investments.
I would add a little on why citi trades poorly even relative to other banks.
Citi produces below peer levels of returns. Many reasons:
Their identity as a bank is “the big international bank”. Oftentimes customers choose Citi over other banks for citi’s large international branch network. That real estate is expensive. It also creates a web of expensive middle management that further erode profitability while also slowing down the organization.
Citi also doesn’t have the same caliber of fee businesses (IB, asset / wealth, insurance etc) to make up for the struggling spread lending businesses
That’s why Citi trades not just at a discount to tbv but also why it trades at a discount to peers
The FT did a quite interesting piece on Citi recently. It’s a roughly 20 minute video and worth the watch
Link here for anyone interested
Everyone is holding assets that haven’t been marked to market since raise. Betting on dip in rates, may get some of it but not all.
FED said everyone takes the loss on treasuries except you banks (Bank Term Funding Program “BTFD”), we will lend against them at par (mostly)…Also provides liquidity to off the run issues that otherwise spike yields (2018), learned lesson
BBs spent 5 years (or more) lending to everyone and their mom at low rates, now the rates are much higher. Those receivables not worth as much, not close either. Good amount illiquid as well, price discovery only if they have to… better just wait it out.
Confidence in banks >>> all else. FED knows and will let banks obfuscate the balance sheet (don’t have to disclose if they used BTFP till year after the program ends)
Inflation a supply side story only. Watch energy and housing, food fine in west.
Basel 3 news not helping -> highly deflationary. Shift to private credit also deflationary, funds can’t create money, banks can. Duration mismatch key to prosperity/money creation.
Deflation always been the bigger problem, FED can’t make money and hasn’t since 50s. Can’t drill for oil or build houses either. Offshore the story, wage inflation is housing solution. QE not money printing, just an asset swap. Treasury can create $$ but tbd. .
Crypto solution inevitable, likely BTC but if not others can solve problem in joint ecosystem. Technology doesn’t care.
fuck, this is probably the most informative broken english in the world right now. I feel like I'm discovering fire using a hieroglyph instruction manual.
I think I need to take another economics course. Or the FIG course on here
What is the deal with duration mismatch and what is that in general? How does that lead to money creation?
Average time to maturity of a banks loan book vs. the average required time to provide customers with their cash if asked. Duration of loans do not need to and should not equal duration of deposits (primarily on demand deposits). Chamath and others are wrong when they say this. If they did, would heavily limit loan creation and be giga deflationary. Banks would be piggy banks and not money dealers, that would be bad bad (FED knows this and won’t approve bank license if you try to do this, you must lend, cannot hold deposits only). This is why private credit replacing bank debt is deflationary. Funds being locked up solve duration problem but can’t create money, much worse and bigger problem.
Banks create money with loans, not FED. QE is an asset swap, treasury for FEB interbank reserve token. Never makes it to real economy. Banks already at healthy reserve levels. FED stuffing them with more reserves to incentivize real money creation since they cannot do it. Banks saying “no too risky, I’ll just trade these tokens between other banks and bid up liquid collateral like treasuries.”
why do you view crypto as an object for increasing the money supply?
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