It certainly looked good on paper, but Citigroup's (NYSE: C) ambition to acquire its way to global dominance as a for clients seeking banking, insurance, investment and just about any financial advice imaginable, has miserably failed. A corporate umbrella that spanned Travelers (NYSE: TRV) and its famous red umbrella logo as well as financial services organizations throughout the world became increasingly unwieldy and almost came completely unglued during the credit crisis.
Thankfully for existing shareholders, Citigroup has survived its near-death experience and is in the midst of regrouping. Its current ambition is to downsize and "right-size" its business strategy by shedding non-core assets to focus on those with a better mix of growth and profit potential. This strategy is being championed by the current helmsman, Vikram Pandit, who is also remaking the board of directors in an attempt to move beyond the ill-fated buyout mindset that Sandy Weill used to expand the company.
Citigroup is still in a state of flux and will continue to be for at least the next couple of years. As a result, reported earnings will likely be negligible for 2010 and 2011. Recent moves have focused on jettisoning U.S.-based businesses, such as Smith Barney and Primerica (NYSE: PRI), the last of which announced a recent initial public offering and will let the company sell off its remaining ownership position over time. Most of the remaining flux will center on the Citi Holdings unit that was set up to contain riskier assets and businesses Citigroup considers non-core and earmarked for sale or divestiture.
The current make-up of Citi Holdings consists of the joint venture investment by combining Smith Barney with Morgan Stanley's brokerage unit, North American residential and commercial realloans, other auto and personal loans that went sour and similar assets that became illiquid as a result of the credit debacle. This unit reported an $8.2 billion loss last year, which, though still sizeable, was down significantly from the $36 billion loss reported in 2008. The division currently has about $550 billion in assets yet to unwind, representing close to 30% of Citigroup's total assets.
As Citigroup sheds its non-core holdings, the company has stuck with building out its global presence. It recently announced plans to focus on mobile phone transactions in India and has focused on Singapore, Hong Kong, South Korea and parts of Latin America to build out its credit card and consumer banking capabilities.
The end result of this corporate makeover is that Citigroup should end 2010 with about $1.7 trillion in assets. Shareholder's equity should end the year at $150 billion, or close to $5 a share in book value. It will take at least a couple of more years for returns on that equity (ROE) to revert to historic levels .
A 10% ROE equates to $0.50 in earnings and a forward price-to-earnings multiple of nine. A 15% rate implies $0.75 in earnings, for a forward P/E of less than six. A return to 20% like Citigroup saw in 2000 is unlikely, and it may take until 2012 or later for returns to improve, but it isn't difficult to see Citigroup's share price somewhere between $10 and $15 by that time. This implies annual gains in excess of +20% during the next three to five years.
There is still risk to any upside in Citigroup's stock as it could prove challenging to wind down the rest of the Citi Holding assets. Also, while Vikram Pandit is proving adept at breaking apart Citigroup, he will eventually have to prove to investors he is capable of shifting gears to restoring the company to sustainable revenue and earnings growth. Ironically, it may take a return to acquiring large international banking rivals to make a meaningful impact on profit growth, especially once all non-core assets are finally shed. But so far, Citigroup is on the right track.