Citigroup (C) trades at a discount to book value while generating a fair amount of capital through earnings, and the money center bank is expected to appreciate in the next couple of years as the market prices these characteristics as well as the bank’s international assets and growth prospects, says Moshe Orenbuch, Managing Director at Credit Suisse Group.
“Citi for the very simple reason that we think it sells at not just a discount to book value, but a discount to what it would be worth if you looked at the banks that comprise Citi in the various countries in which Citi operates. Mexico is one of the largest countries for Citigroup, and Mexican banks trade at probably 2.5 times earnings. Brazil is a fairly large component as well; non-Japan Asia in the aggregate is a reasonable driver. And yet Citi as a company still trades at 90% of tangible book. Profitability has been under pressure, and they have a large deferred tax asset, but we believe both of these factors will improve in 2013 and 2014,” Orenbuch said.
Orenbuch says capital levels are healthy among the large banks, and the earnings at Citigroup are fair. The bank’s international presence further highlights its difference with other U.S. banks, making the company stand out among its peers.
“Citigroup is expanding in some of its emerging market countries, and so it has a different path. Everyone is trying to build up their retail mortgage originations, so that when refis go away they can get a bigger share of the purchase market. But there is no guarantee that the purchase mortgage market is going to increase ratably as refis decline. In fact, refis are probably going to come down somewhat faster,” Orenbuch said.
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