Citigroup's Strong Earnings Make Life Harder for Corbat

NEW YORK (TheStreet) -- Life may just have gotten a lot harder for Citigroup (C) CEO Michael Corbat after the bank beat first-quarter earnings on rising revenue and profit. Judged against restructuring Wall Street peers like Morgan Stanley (MS), Citigroup's strong earnings indicate the bank may be losing ground in Corbat's second year on the job.

On the heels of strong earnings, the most basic value of Citigroup's business, its theoretical liquidation value per share, is rising far faster than the bank's share price.

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Corbat entered the year within reach of bringing Citigroup shares to a premium of its tangible book value (TBV) per share, or what investors and stock analysts characterize as the bank's liquidation value were all assets sold and all liabilities immediately covered. At one point in the first quarter, Citigroup shares traded as high as $55.28, or just 3 cents lower than the bank's tangible book value per share as of the fourth quarter.

However, a set of stumbles like a fraud at the bank's Banamex unit and failed Federal Reserve-administered stress test in March have weighed on Citigroup's shares, pushing them 9% lower year to date. Meanwhile, Citigroup's rising earnings mean there is a widening disconnect between the company's share price and its liquidation value.

Citigroup's tangible book value per share increased 8% in the first quarter to $56.40 a share, as a result of earnings that included a near $4 billion profit on $20.1 billion in revenue, a surprising rise from year-ago levels. Those earnings mean that Citigroup trades at an about 15% discount to its tangible book value, given an over 4% rise in the bank's shares to $47.67 on Monday.

Currently, Citigroup is the only "too big to fail" U.S. lender to trade at a discount to tangible book value per share. Other restructuring firms like Bank of America (BAC) and Morgan Stanley have spent years re-aligning their businesses and settling lawsuits, and their current premium to TBV indicates some rising investor confidence.

At Morgan Stanley, the TBV premium is a particular highlight for CEO James Gorman who took the bank's reins just after the financial crisis hit and caused it to accept bailout money and seek an equity infusion from Bank of Tokyo Mitsubishi. During that time, Gorman devised a strategy to reduce the standalone investment bank's exposure to costly fixed income trading and invest heavily in less capital intensive businesses like wealth management. The results are encouraging.

Bank investors generally use book value and tangible book value as a simple gauge on confidence in a firm. Lenders that trade at a premium to tangible book value and even book value reflect investors' expectation of the firm's growing value. That, consequently, translates to a barometer on C-Suite performance. Investors should believe any good management team can grow the value of a business.

Warren Buffett uses book value as his preferred metric when speaking about Berkshire Hathaway's (BRK.A) earnings. Berkshire trades at nearly two times its tangible book value per share and nearly 1.5 times its book value per share.

Some large banks like Goldman Sachs (GS) risk falling into Citigroup's position after years of trading at a premium to TBV. Goldman trades at $152.72, a modest premium over last quarters' TBV of $143.86. TBV, however, may rise strongly in the first quarter, possibly narrowing that premium if investors discount an earnings beat.

Bottom Line: Citigroup's strong earnings are overshadowed by the bank's recent stumbles. Misery, however, loves good company.

-- Written by Antoine Gara in New York

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