Thursday, June 12, 2008

Regarding Citigroup

I'm no longer long C, but am always looking at re-entering the name. A high-profile short, Doug Kass, is now long C, which makes me look again.

Here's a very quick analysis of C: I have revenue dropping to $79.5 billion in 2008, rising to $89 billion in 2009 and at $99 billion in 2010, with core income of $21.5 billion (2008), $29.0 billion (2009) and $36.5 billion (2010). I have assumed that the loan-loss provision stays elevated over the 2008-2009 period at approximately $15.5 billion and drops to $9 billion by 2010. With radical cuts in fixed costs, non interest expense should be flat for the three year period -- providing the catalyst to operarting leverage.

This translates into fully diluted EPS of about 70 cents per share, $1.60 per share and $3.25 per share (ROE returning to 12.2% level) for 2008, 2009 and 2010, respectively.

Unlike Meredith Whitney, I expect dividends (which for 2008 will total $1.27 per share) to be raised to $1.35 in 2009, and again in 2010, to $1.45.

As the toxic stuff is extracted from the current portfolio, the consistency of core banking (net interest income) profits will be more apparent. And if one attaches a 20% deposit premium ($150 billion) on top of tangible book value ($61 billion), it produces a $37 to $39 per share franchise value -- and that's without assigning premiums to the core commercial, investment banking, wealth management and other businesses.

Position: none, but always looking

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