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Special | Zhang Jingshu
In an interview before the COVID-19 pandemic, Buffett also mentioned, "Investment bank stocks will not be a home run, but I think it is not a big problem to outperform the market in the long run." As of the end of March 2022, the total value of Berkshire 's financial stocks (not counted as rating agency and credit card issuers) reached US$83.7 billion, accounting for 23% of its entire portfolio. Among them, Buffett spent nearly US$3 billion to buy Citibank in the first quarter, compared with other financial stock targets such as banks, it is a "unique" existence.
The author believes that in addition to the rise of interest rate in favor of banks, the most core investment logic lies in "reversal of difficulties".
Buffett's position in the first quarter,
looks a bit "not perfect"
Citibank was bought by Buffett in the first quarter, spending about 3 billion US dollars, which is about 3% of the entire bank's equity . The author believes that the logic of Buffett's investment in Citibank is different from the logic of holding all other banks.
Because , in addition to rising interest rates, is beneficial to banks, his most core logic of investing in Citibank is "reversal of difficulties". Therefore, Citibank should be considered a "unique" existence in Buffett's entire portfolio.
Those who are familiar with American financial history will not forget that Charles Springs took over Sandy Wells to the helm of Citibank in 2003, intervening heavily in debt-backed securities (CDOs) and real estate mortgage securities (MBS). During the financial crisis, the stock price fell 98% from the top to the bottom and was forced to step down. The year he stepped down, he took away $38 million in salary and bonuses, which aroused public anger and was one of the inducing factors of " occupying Wall Street ".
After the financial crisis, Citibank's performance has always been inferior to other banks of similar scale. For example, during last year's Citibank conference call, management provided guidance for the next five years - hoping to reach 11% to 12% ROTCE (return on capital for tangible ordinary equity) within five years and achieve a revenue growth of 4% to 5%, which is the medium-term goal.
You should know that in the past quarter, JPMorgan Chase has achieved a 17% ROTCE, and Citibank told investors that it will only reach 12% in a few years, so it is not difficult to understand the sharp discount. In addition, the effectiveness ratio (cost/revenue) of Bank of America and JPMorgan Chase has reached below 60%, while Citibank's medium-term goal is to move towards 60% and strive to achieve the industry average. Finally, Buffett said that the bank profitability indicator , which he is most concerned about, is the return on asset ROA. We might as well compare Citi with Bank of America, Morgan and Wells Fargo .
From Figure 1 we can see that Citibank's return on capital has basically ranked last in recent years. From the perspective of business, Citibank is a very special bank. Its revenue is contributed by the Institutional Client Group (ICG), with personal banking and wealth management only 31% of revenue share, while traditional franchise and others account for the remaining fraction.
The business of the institutional client group mainly covers the operations of commercial banks and capital markets, and Citibank has a global footprint and can better cover large transnational companies, which is difficult for many competitors to achieve. But it is also because covers an institutional client worldwide, so it operates within different legal jurisdictions, and its compliance costs are also very high, and it requires the potential risk of floating geopolitical and currency exchange rate.
In addition, Citibank has the lowest sensitivity to interest rates . In other words, among several large banks, the positive impact of rising interest rates has the least impact on Citibank. Because unlike banks such as Bank of America and JPMorgan Chase, Citibank's retail branches are relatively low, which directly leads to the phenomenon of high customer acquisition costs and low savings on the retail side.
How can banks enjoy the benefits of rising interest rates? benchmark interest rate has been raised, savings interest rate has risen very little, loan interest rate has risen a lot, interest spreads have opened, and the profitability of interest-generating assets has been enhanced, so banks have gained favorable benefits in the upward interest rate. But this kind of benefit transmission is the most insignificant for Citibank.
From Table 2 we can see that Citibank's interest-free savings account for the lowest proportion, which is 10% less than JPMorgan, which ranks second to the bottom. Note here that the reason why the percentage is not 100% of the total is because there are also accumulated costs (Accrued Expenses) and institutional savings (Institutional Deposits). Therefore, Citibank has the lowest sensitivity to the next rate hike in .
Then the problem arises. Why did , a company with poor profitability, poor cost control, wide global footprint, higher regulatory compliance costs, and lack sensitivity to interest rate hikes, attract the attention of the "Stock God" and cost him nearly 3 billion to hold it?
Citibank's future "money prospects" can be expected
"difficulty reversal" logic is expected to be staged again
Munger said that when playing basketball, you should predict where the ball will go in the future, rather than paying too much attention to where the ball was before. This sentence is probably particularly applicable to Citibank, which has "striking bad records". The author believes that the core logic of Citibank is mainly as follows:
first, with low price. Over the past five years, bank stocks have not performed well due to central bank 's low interest rate policy. Among the financial stocks in which Buffy holds , except for Bank of America, which rose 54.35%, the stock prices of several other bank stocks are falling. From a valuation perspective, the overall valuation of bank stocks is generally not high at present. For example, the S&P 500's price-to-earnings ratio is 16 times, while the price-to-earnings ratio of bank stocks is at least 25% lower than the market average.
For example, JPMorgan Chase and Bank of America are both valued twice as much as tangible assets, while Citibank is only 0.6 times the tangible assets; JPMorgan Chase and Bank of America are both price-to-earnings ratios of 10 times or more, and we can see in Table 1 that Citibank is uniquely only 7 times the price-to-earnings ratio.
But now interest rate hikes are a foregone conclusion. As long as there is no economic recession, the interest rate hike environment is historically beneficial to the performance of financial stocks, especially bank stocks, which is confirmed by the financial reports and management guidance of many disclosed first-quarter net interest income.
Second, shareholders are very willing to give back. alone is definitely not enough for low stock price. A very simple example is that the price-to-earnings ratio of a certain bank in China has always been 3 to 4 times, and many so-called "value investors" are flocking to it. As a result, the bank actually issued additional shares at a low price to raise funds. What's the point of such a low valuation? Let’s take a look at how Citibank’s management evaluates shareholder feedback during the conference call. Citi's CFO Mark Mason said, "We have repeatedly reiterated that it is very appropriate for us to do repurchases at this stock price. So we do not tend to change and pay dividends , but return to the stock through repurchases."
Citi's new CEO Jane Fraser, said, "Now, based on the stock price we are trading now, repurchases are very important and may be the first thing we need to do. Therefore, we must reaffirm the importance of returning surplus capital to our shareholders." Citi is indeed doing this. Its repurchase scale will be as high as US$25 billion in the next few years, accounting for 25% of the entire market value. Among the major banks, only Bank of America has the same repurchase scale, but Bank of America's market value is three times that of Citi.
repurchase has two major advantages for bank stocks than dividends. The first is to put a universal low tax rate, and the second is to be more flexible. It can reduce repurchase when the economy is down, unlike dividends, once it is promised, if it decreases, it will have a great negative impact among investors.
Third, if low valuation and strong shareholder feedback are the basic conditions for investing in a certain company, then this may be the key to Buffett's decision to invest in Citibank. We mentioned earlier that Citibank has encountered many difficulties, so the management team that has worked hard at Citi has strong ability to deal with difficulties. The new CEO Jane has worked in different departments of Citibank in Europe, Latin America and the United States, covering wealth management, mortgages, consumer banks and commercial banks.
After she took office, she made a very important decision to cut off all consumer banking businesses with weak synergy and poor profitability. This covers 14 different markets, including Australia, China, India, Indonesia , South Korea, Malaysia , Mexico, Philippines , Poland , Russia, Thailand, Vietnam and other countries. The average effectiveness ratio of Citi's operations in these countries is 77%, which is much higher than the average level of the company's consumer banks, that is, about 60%.
Consumer banks are different from commercial banks because commercial banks in different regions can serve the same multinational company to form synergy, but consumer banks do not have this cross-regional network effect. For example, serving customers in Mexico well will not help the loyalty of North American customers. Selling these departments can generate more than $15 billion in cash and can also regain a large amount of capital that has been promised for compliance. These funds can be used to develop wealth management businesses with higher profit margins and lighter assets, or to buy back cheap equity.
Since Jane had already performed well in Citi, and Buffett had a wide connections, he should have a deep understanding of Jane's ability and reputation as a manager. Therefore, his investment in Citibank is actually a vote of confidence that the management helped Citibank achieve a "reversal of difficulties" and regained the glory of the day, and he voted for confidence. If Citibank can return to the industry average, then the current share price of less than $50 per share should also double. The process of
inversion takes 3 to 5 years according to the management deployment and planning. Of course, what value investors lack the least is patience.
In addition, some investors may be worried about their business losses in Russia. According to information disclosed by Citi, banks have a risk exposure of $10 billion in Russia and may suffer a loss of $4 billion in the worst case, equivalent to a market capitalization of 4%, or 0.3% of the total asset size. Considering that Citibank has fallen so much, the author tends to believe that this part of the risks have been fully confirmed by the market.
(This article has been published in "Red Weekly" on June 4. The article mentions stocks for example analysis only and does not make buying and selling suggestions.)
#Buffett# #Citibank# #Bank Stock#
