America’s leading global bank Citibank Inc. (C, Financial), popularly referred to as Citibank is a stock to look forward to.
A smart deal
Citibank recently inked a deal with Costco Wholesale Corporation (COST, Financial) which makes it the new credit partner for Costco along with Visa Inc. (V, Financial). Only last week did Costco end its deal with American Express Company (AXP, Financial).
By April 1, 2016, Citi is expected to add $1.4 billion to its portfolio through this deal, which ideally translates to 2% of its car loans an 0.8% of interest earning assets. Citi is believed to have more strategic advantage from this deal than what may appear from the first glance. Citi has managed to swiftly allocate $400 Million from the additional deferred tax assets (DTA) in the form of $4.25 billion funds earned by it through the sale of OneMain to Springleaf (LEAF, Financial). Besides the faster utilization of DTA funds, Citi will also be able to able to increase its revenue growth, improve efficiency ratio and reach a higher profitability zone.
Gaining ground with analysts
With this deal Citibank has gained brownie points with the leading analysts. Citibank had been losing its share in the U.S. credit card market and the moderate fundamentals of the company have been a cause of worry for many analysts. This Costco co-branding deal has managed uplift the spirits of analyst at JP Morgan who feel that the lacklustre performance of Citibank in credit card segment can now be reversed with this new business. Morgan Stanley (MS, Financial) also felt that this is a positive move for Citibank as it reflects Citibank’s capacity to utilize excess capital for accretive acquisitions.
During the financial crisis Citibank lost a lot of money, and it now has $50 billion of tax credits. In fact analysts believe that it is these tax credits that allowed Citibank to offer a deal that suited Costco. The fact that American Express indicated it was not interested in renewing its contract with Costco because the retailer was demanding unreasonable terms, proves this deal wouldn’t have been viable for many other banks due to razor-thin profit margins. Analysts believe that Citibank could leverage its tax credits into offering Costco a favourable deal. Although Citibank officials have declined to comment on the correlation in between the tax credits and it securing the Costco deal.
Some other strategic moves
In a bid to cut cost and boost profits, on March 5, 2015 Citibank sold the balance 9.9% stake in Turkey’s fourth largest bank in terms of assets and second largest in terms of market value, Akbank T.A.S. for $1.2 billion. Citibank has offloaded its stake in Akbank at a loss of $800 on the value of its purchase in 2007. Citibank sold off almost an equivalent stake in the bank in 2012 as well. Citibank made $2.3 billion from the total offload in Akbank against $3.1 billion it spent buying 20% stake in the bank in 2007. Although a sizable loss, the move is seen by the street as a smart one. The Turkish banking sector is under severe pressure due to government and political interference putting the future of Turkish banks into oblivion.
Stock take
On Tuesday JPMorgan upgraded the stock from "Neutral" to "Overweight" and raised the share price from $48 to $58. In February Deutsche Bank (DB, Financial) upgraded its guidance on Citibank from "Hold" to "Buy" at a share price of $54. Jefferies has maintained a "Hold" position on the stock at a price of $56. The stock movement has been very erratic in the past few months. The price changes have taken place in the band of $46 to $54. But it has shown a northward movement since the beginning of February and the market hopes that the momentum continues.
Our take
Citibank has been offloading loss making assets and focusing on its core business. It has also shown the capability to utilize the tax credits to its advantage by investing the funds to increase its revenues and profitability. Going by the smart moves and the renewed confidence of analysts, it would be a strong "Buy" or "Hold" recommendation from us.
