Even before the shares dropped 6% in after-market trading following the Fed's announcement, Citi's stock was cheap. The shares closed at $50.16 Wednesday and traded for 0.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 8.8 times the consensus 2015 earnings estimate of $5.71 a share. The consensus 2014 EPS estimate is $4.81. Those are the cheapest price-to-tangible-book and price-to-forward-earnings ratios among large-cap U.S. banks.
Citigroup's long-term shareholders have been long-term sufferers. The dilution of Citi's shares has been quite significant, because of the bank's common-equity raises following its $45 billion bailout in 2008 and because of the conversion of part of the government's preferred stake in the company to common shares. The 10-year total return for Citigroup's shares through Wednesday's close was a negative 88%, factoring in the reverse 1-for-10 split the shares underwent in 2011.
Since the Fed's rejection of Citi's capital plan was based on qualitative and not quantitative concerns, it would appear doubtful the company can improve its risk-management systems sufficiently this year for the Fed to approve a revised capital plan that includes a dividend increase or share buybacks this year. The Fed indicated the unique global nature of Citi's business is part of the problem, saying, "Practices with specific deficiencies included Citigroup's ability to project revenue and losses under a stressful scenario for material parts of the firm's global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."
"Prior to today, we viewed Citigroup as the best restructuring opportunity in large-cap financials," Cannon wrote, adding that the bank's restructuring under Corbat "has been slow to progress."
"As a result, we believe investors can find better investment opportunities in Financials despite C's discounted valuation relative to peers," Cannon added.
Citigroup's excess capital continues to grow, which places a drag on the bank's return on equity, and the bank's inability to repurchase its discounted shares should weigh heavily on the stock when trading opens at 9:30 a.m. EDT Thursday.
Cannon didn't offer any harsh assessment of the Federal Reserve's action, but CLSA analyst Mike Mayo sure did, writing in a note to clients late Wednesday, "In the new world of Big Brother Banking, the government can make decisions such as this, even if a bank is well above regulatory minimums, allowing a new level of regulatory discretion. The Fed's decision makes it look like there is no level of capital that is sufficient whereby Citi could repurchase stock."
Mayo called the Fed's rejection of Citi's capital plan "a shocker," and added that "Citi needs to make this defeat into victory," by restructuring faster, including a possible sale of Banamex, as well as "enhancing governance and holding managers more accountable, especially after management's reassurance about financial processes."
Mayo continues to rate Citigroup a "buy," although he lowered his price target for the shares to $58 from $60 on Wednesday.
Citi's stock was down 6.2% in premarket trading Thursday, to $47.93.