By Steve Garcia                            

Last week, Citigroup (NYSE:C) showed a net profit of $2.7 billion, or 9 cents per share when they announced Q2 results, which was down from the 49 cents per share profit of Q1. Citigroup revenue was $22.1bn, down $3.4billion from Q1 2010. Citigroup CEO Vikram Pandit, was happy with what he termed ‘solid’ figures for the latest quarter. Compared with same period last year numbers, consumer banking revenue rose 9% in Latin America and 10% in Asia, more than offsetting declines of 3% in North America and 5% in the Europe-Middle East-Africa region. On a global basis, consumer banking revenue rose 2% from a year earlier, to $8.03 billion.  Trends were similar for transaction services, with revenue rising 5% in Latin America and 6% in Asia and falling 3% in North America and 1% in the Europe-Middle East-Africa region.

With that in mind;  Citigroup continues walking the green mile to sustained profitability this quarter as the Treasury Department announced it will sell 1.5 billion more shares of Citigroup (NYSE: C) stock over the next couple of months.  This is the third tranche sale in the government’s Citigroup bailout fund recovery effort.  The proceeds are part of the repayment of funds from Citigroup’s portion of the $700 billion financial bailout.  The third tranche of Citigroup stock sales will start immediately and be completed by Sept. 30, according to a spokesperson at the Treasury.

The government has already sold 2.6 billion shares for $10.5 billion in the first 2 tranche sales over the course of the last 2 fiscal quarters.  Citigroup originally received $45 billion in taxpayer funds through the Troubled Asset Relief Program (TARP).  Of the $45 billion, $25 billion was converted to a government-ownership stake through shares of common stock  with Treasury receiving 7.7 billion shares at a share price of $3.25.  At that time, the stake equated to 27 percent of the company.  Citigroup repaid the $20 billion unconverted portion of the loan last December.  Citigroup stock over the past 52 weeks has ranged in price from a low of $2.56 to a high of $5.43.

The Treasury Department has stated its intentions to sell its entire stake in Citigroup by the end of this year.  The first tranche of sales, covering 1.5 billion shares, concluded in May.  The second, which covered another 1.1 billion shares, ended recently after beginning in June.  Once those shares are all sold, I would expect some sort of share repurchase by the company, or perhaps a reverse split to reduce the bloated share count.

Though heavily criticized, and rightly so for bailing out these huge financial institutions, it is nice to know that at least there will be a return on the Citigroup investment by the government when all is said and done that can be used to pay off some of the deficit it created.  Simple math shows at least a 10 billion dollar increase in share value at an average price of $4.00 dollars. 

It is also good to see Citigroup continuing its course of return to a core banking institution.  The company continues to re- evaluate its assets and look for buyers for assets deemed expendable by Citigroup in its return to focusing on its core businesses.  Cautious optimism is the thought also with non US markets continuing to show growth for the company, particularly Latin America and Asia. While the growth has been good in those regions, it is still on fragile footing with global economic concerns still prevailing.  Citigroup also is beginning to see real reductions in operational costs from strategies it implemented over the past decade or so of severing long time employees and management and bringing in less experienced and less expensive personnel to replace them.  The initial cost of those severance packages may have been worth it considering the state the company found itself in, in late 2008 and into 2009.  One has to question the decision though as there is no substitute for experience in the highly competitive Banking business.  Overall, Citigroup is getting healthier as a company as it trims the excess fat, sells off non essential assets and toxic debt is painstakingly removed from its ledger. Citigroup is on an upward trajectory if it continues to execute its plan.

 Disclosure: No position in C at this time

By Steve Garcia

Citigroup (NYSE:C) is slowly ascending once again, which is interesting given Citigroup was recently mentioned, along with Bank of America (NYSE:BAC) and Deutsche Bank (NYSE:DB), as being among a group of financial institutions that shed debt just before quarter’s end to disguise levels of risk. The companies have been lowering their net borrowing in the repo market by an average of 41% at the end of each of the last 10 quarters, according to Fed Reserve data. This points out the systemic issues that have yet to be fully addressed in the Banking industry; as extensive use of repos was what allowed Lehman to improve its risk appearance quarter after quarter before that firm was forced into bankruptcy in September of 2008.

An upgrade from Oppenheimer in which they raised their outlook on Citigroup to outperform may also have contributed to the sudden momentum in Citigroup shares. Oppenheimer sees Citigroup shares trading below book value of $4.09 or so. Reducing short term borrowing ahead of the end of a quarter does not appear to be illegal at present, but the Securities and Exchange Commission is reviewing and considering new rules that would require increased disclosure of such practices, according to a recent report in the Wall Street Journal.  The repurchase market, more commonly known as the repo market; where banks put up securities as collateral to get quick access to funds, is one of the riskiest ways to borrowing because it is so short term. If sudden panic were created for some reason and markets seized up, banks that rely too heavily on this particular market transaction could suddenly find themselves in a funding crisis, such as what happened with Bear Stearns and Lehman Brothers during the 2008 financial market collapse. Citigroup stock may also be rising from a report in the Financial Times that said that the Qatar Investment Authority is strongly considering buying some of the U.S. Treasury’s 27% stake in Citigroup. (more…)

By Steve Garcia

Citigroup (NYSE:C) shares continue to be volatile.  Shares of Citigroup, which were trading at more than $55 per share in 2007 plummeted to less than $2 in 2009 and have begun to recover reaching more than 5 dollars in April.   Citigroup shares closed below 4 dollars in trading yesterday at $3.86 per share.  This is not an unexpected situation for informed investors; as the government owns more than one quarter of Citigroup, and has been unloading roughly 20% of their stake of approximately 7.7 billion shares in the company since late April.  The Treasury began selling its common shares under a prearranged plan with Morgan Stanley as the sales agent for the deal.  The initial sell off of shares amounts to roughly 1.5 billion shares. Citigroup stock should basically trade sideways to slightly lower while unwinding of this first lot is completed.  Once complete, the stock should move up as the company continues to unwind or sell off many of its toxic assets; on the path back to its core banking business as the fundamentals continue to improve.  It is important to remember that at some point the Fed will have to raise interest rates and banks like Citigroup will once again have to actually work at turning a profit, but over the long haul, this stock should bring solid gains to its holders. (more…)

By Steve Garcia

Citigroup (NYSE:C) said Friday that it will buy back $535.9 million worth of its notes as part of tender offer which was previously announced.  The cash tender offer expired at 5 p.m. Thursday.  As of the expiration date about $535.9 million aggregate principal amount of notes were validly tendered and not withdrawn or were subject to binding commitments to sell to Citigroup.  All of the debt notes being repurchased were scheduled to come due this year and in 2011.  The move is part of Citigroup’s strategy to utilize available cash to terminate debt nearing maturity and reduce overall interest payments.  The tender offer is not expected to impact liquidity, the company said. Citigroup expects to settle all tenders by May 11. (more…)

A comfortable relationship

By Steve Garcia

As the enthusiasm for shares of Citigroup (NYSE:C) following an incredible turnaround quarter begins to fade, there appears to be more good news coming.  Prince Alwaleed Bin Talal, the Saudi Prince who is a large investor in Citigroup, announced this week that the globally reaching, New York based bank is applying to open an office in Saudi Arabia. Citigroup stock traded in the mid 4 dollar range at close yesterday; down from the previous day’s trading with continued heavy volume. Profit taking and slow but steady unloading of the US governments position most likely has been a factor in the downward momentum. (more…)