NEW YORK (
may be a "fundamentally different" company from what it was in 2008, but you can't tell that from investors' treatment of the stock in the past week.
Shares of financials have been repeatedly clobbered with every market plunge as investor grow increasingly nervous about the impact the unprecedented downgrade of U.S. debt and an escalating sovereign debt crisis in Europe would have on banks.
Vikram Pandit, CEO, Citi
But the stocks of Citigroup and
Bank of America
saw the kind of sharp downswings that brought back painful memories of 2008 when the financial crisis was at its peak.
Citi's stock gained more than 6% on Thursday to close at $30.29. That was after a 16% plunge on Monday, a 14% rebound on Tuesday, followed by another 10% drop on Wednesday.
Year to date, the stock has shed 36%. At the current market price, it trades at half its book value of $60.34 per share and at 62% of its tangible book value.
Bank of America's latest woes are well known, so the stock's moves are not exactly a surprise. But the outlook for Citigroup has improved significantly in recent quarters as its strong international presence boosts loan growth, even as it continues to make headway in shedding non-core assets.
Still, it appears that as far as the market is concerned, Citigroup is not much better off than it was three years ago when the government had to bail it out.
"Citigroup is still viewed more in the Bank of America camp than in the
camp, though I would disagree," says Anthony Polini, who covers the bank at Raymond James. "It carries a higher risk perception that has more to do with its recent past. People still remember Citi as the bank that needed government support," he added.
CEO Vikram Pandit has over the past week tried to
reassure employees amid the market panic that the bank's fundamentals are intact. "Although the decline is difficult to watch and naturally reminds all of us of what happened several years ago, there is little similarity between now and then in both drivers and implications," Pandit told senior managers in a voice mail. "Not only is it a fundamentally different time, but we are a fundamentally different company," he added referring to the restructuring the company has undergone in recent years.
The message from the CEO did little to appease markets whose memories of 2008 are still fresh. After all, banks that said they did not need more capital ended up seeking billions. Investors burned by the crisis might be more reluctant to trust Wall Street honchos this time.
"If they ever come out and start to defend their liquidity, you really have to be worried," Fred Cannon, director of research at KBW quipped in an interview on
. "But in general, if we do look at Citi, it really has changed fundamentally from what it was. There has been a major restructuring. I don't think you can say the same for Bank of America... there hasn't been the same kind of restructuring by any stretch."
Citigroup reorganized its businesses in 2009 into a "good bank", Citicorp, that houses all its core assets and a "bad bank" Citi Holdings that contains businesses that are not core to Citi's future, which it would wind down over time.
Citigroup has disposed of $519 billion of assets in Citi Holdings since the first quarter of 2008. Totally, the bad bank now accounts for only 16% of its total assets. Winding down Citi Holdings is crucial to the bank meeting regulatory capital standards. While the pace of future asset sales is beginning to slow, analysts believe Citi should be able to comfortably meet its targets by 2012 and begin returning capital to shareholders.
Not that the" new" Citigroup is without its challenges or risks. Its emerging market presence, which is its greatest revenue driver, may be vulnerable if the crisis in Europe has a domino effect and global growth slumps, according to Polini.
While its exposure to the troubled euro zone nations of Greece, Italy, Ireland, Portugal and Spain is still considered manageable, the bank is under scrutiny after it disclosed its $22 billion net exposure to the region, $9 billion of which is unfunded. That is higher than the $14 billion in net exposure to GIIPS revealed by JPMorgan.
Still, analysts maintain that the recent sell-off is overdone. "While significant headwinds remain, including a weak economy, ongoing litigation exposure, the sovereign debt crisis, a declining NIM, and pressured trading revenue, the second quarter reflected continued positive operating trends for C, including revenue growth, loan growth, and improving credit metrics," Sandler O'Neill analyst Jeff Harte said in a recent note.
"C has what we believe to be a significantly undervalued franchise, with less exposure to mortgage related problems than many of its direct competitors. Trading at only 65% of TBV and less than 6x our 2012 EPS estimate, we believe the stock remains fundamentally undervalued."
--Written by Shanthi Bharatwaj in New York
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