hi i'm jimmy in this video we're looking
at citigroup ticker symbol c so we're
going to start with the city's business
and then we're going to look quickly at
what city is calling their brand refresh
then we're going to look at some of the
financials and finally we're going to
wrap it up with a fair value calculation
for city stock now before we jump in i
actually want to tell you real quick
about a website that we're building
where you can quickly and easily
calculate the fair values for the stock
so basically what you do is you're
punching a ticker up here in this case
we're using amazon the computer then
pulls down free cash flow estimates from
different analysts it also tells you how
many analysts are giving us those
numbers and then using whatever our
personal required rate of return is well
it calculates the fair value of the
stock in this case is the reason this is
from a recent video an analysis that
i've done on amazon i'll leave a link in
the description below if you're curious
to see that video and basically we can
see here that it looks like amazon looks
like it could be slightly overvalued at
this point but the idea of the website
is that we can quickly and easily keep
punching in a bunch of tickers run
through it pick how long we want to
project out and then try to come up with
a fair value for that stock now
interestingly we are doing a city
analysis in this video and discounted
cash flow which is the first tool that
we're creating
actually doesn't work for banks it's not
that citigroup doesn't have free cash
flow it's that they don't do free cash
flow in banks because banks have so much
cash now we expect the discounted cash
flow calculator to be available within a
couple weeks for the community to test
out so if you'd like to sign up i will
leave a link in the description below
but if you're curious for a company like
citigroup well city uh there's a better
ways to value banks instead of
discounted cash flow something like
press to book value price to tangible
book value
in version probably version two of this
website so maybe a month or two from now
we're going to add we're going to just
going to continue to add different ways
to value it maybe we might do
price to adjusted funds from operations
if we're looking at a real estate
company
so the plan is right now we're starting
with the discounted cash flow calculator
but then we're just going to keep adding
different valuation methods and to
eventually every va every stock out
there could be valued we it could least
we could at least confidently come up
with a fair value for that stock that
being said let's jump into our citibank
analysis now okay so this is citigroup's
segments according to their 2021 revenue
now this is actually their old way of
value of breaking out their business
they also broke it out a bit further
breaking it down like this
but
i say it's their old way because with
their brand refresh well essentially
this this came from right from one of
their presentations so according to
their new ceo well what they're doing is
they're trying to focus on what they
call their core strengths so you can
look at something like their u.s retail
bank in the personal banking business
they also have their services business
that does well wealth management uh
banking in general that's a lot of that
is corporate banks so they might do
banking for businesses things along
those lines then they have their market
segment their market segments they buy a
lot of uh money they buy a lot of
treasuries from the federal reserve they
might also uh buy securities do some
inter bank lending we're going to come
to a lot of this in a moment
but as one example when we look at their
brand refresh they recently closed some
of their small business and middle
market banking over in mexico now
they're keeping their wealth management
division in mexico but the idea here is
that if you simplify the business
structure go with
just the businesses where you have
strength go with just the lines of
businesses that you have strength then
in theory it becomes easier to grow and
easier to be let's say number one in
that industry
okay now let's jump over to some of
their numbers now i will warn you that
bank numbers tend to be a little bit
less clean than more traditional numbers
or less less common so we have their
revenue as an example we can see my
first takeaway when i look at this chart
is that revenue hasn't really gone
anywhere for like the past decade
now revenue in the case of bank is
consisting of a few different components
one of them is known as net interest
income now net interest income comes for
it's the difference between how much
revenue a bank generates from their
interest bearing assets
with it offset by how much they pay out
on their interest bearing liabilities so
as an example if they make out a loan of
a mortgage let's say for five percent
and they borrowed the money from us and
they're paying us
one percent maybe in our checking
account that would be high but still
well if they lending it out at five and
they're making and they're
paying us one it they're earning five
percent that they're earning four
percent that four percent revenue is
essentially their net interest income so
this gets this is part of their revenue
number there's also non-interest income
non-interest income comes from things
like uh trading or securities if you
know their stocks that they only go up
or down or commissions that they earn or
fees that they collect from all their
different types of customers that's
where this revenue comes from and then
they have something that is known as the
provision for loan losses
so provision for loan losses is like a
cash reserve that a bank creates to
cover
problem loans the loans that they're
unlikely to get repaid on so if they're
unlikely to get repaid on it they create
a cash reserve
now the most interesting part of this
chart here for me is look at 2021 well
2021 we can see they had a negative year
now the dip in 2021 happened because
they ended up releasing some of the
reserves that they had built up in the
prior year
so in 2020 they basically ramped up the
amount of reserves that they had and
then in 2022 they or in 2020 in 2020
they ramped it up from covet and all
that i guess they expected more
people not be able to pay the back their
loans which is logical but then in 2021
they offset that and that actually gave
them a negative number now this is
important because although we already
saw a chart for revenue this actually
brings us to a chart which is net
revenue after provisions and then what i
did is in most years you deduct
provision for loan losses as we could
see in every year leading up to 2021
because that's a positive number it gets
pulled back because you're not the
company doesn't think they're actually
going to earn that revenue so you offset
revenue with that but in 2021
that was a negative number so it
actually gets added to it so if you ever
see
an increase in their revenue numbers in
their revenue their net revenue after
provisions well this is why that number
looked like a big jump compared to the
previous year because in the previous
year
because in the previous year net revenue
after provisions was about 60 billion
dollars but then it jumped to almost 76
billion dollars which seems like a huge
jump but it's really just a swing in
their net provisions so that's why 2021
was such a unique year at least for in
the case of city because they added back
those numbers now this brings us to the
assets and liabilities of the bank so on
the balance sheet of any company they
have assets liabilities and equity
equity is one of the most important
numbers for a bank and you get equity by
taking assets subtracting liabilities
and then you end up with equity that's
actually how we're going to come up with
the fair value for the company but
before we do that it's very important
that we understand how the ass where the
assets and liabilities come for most
banks so assets for a bank are mostly
financial assets think things like loans
or investments things along those lines
those are the assets that the company
holds so if they make a loan to us well
that's their asset it's our debt their
asset on the flip side liabilities are
flipped around if we make a deposit into
the bank well that is our asset it is
their liability so that is and their
liabilities are mostly made up of
deposits it's like half deposits of all
their liabilities this brings us again
to why equity will be so important take
away take the assets subtract the
liabilities just like that you end up
with equity the more assets they have
relative to liabilities the better that
being said let's kick it off with their
total assets so this is the chart of
their total assets and broadly speaking
when we go back to all the way all the
way back to 2007 well yes assets are
about the same level right now but i
would say that since about 2015 assets
have been gradually shifting higher now
i wouldn't be surprised if we saw some
decrease in assets as they go through
their brand refresh and sell off some of
their businesses
but then hopefully the the plan the
ideal situation is that as they focus on
really what they're good at from a brand
refresh perspective well assets can grow
in the areas that they're best suited to
serve
but once again
assets just like we saw with revenue
assets and liabilities are made up of
different components the first one is
loans so this one we already mentioned
we could see that loans make up some
percentage right less than half but some
percentage of it now this could be loans
to people this could be loans to
businesses so lots of different ways to
make the loans this could be loans to
people or this could be loans to
businesses and then they have something
that they call investments now this
could be uh these mostly investment
securities think think things like
stocks or bonds or other financial
investments so they hold those as well
and that adds to the amount of assets
that they have
then they have interbank assets so
interbank assets are basically
assets that it's when they lend out
money we know it's money that they lent
out because it's an asset so it's money
that's owed back to them so if they lend
out money if
citigroup blends out money to jp morgan
or bank of america they might do that on
an overnight basis or on a short-term
basis well if they lend out that money
that's an asset for as long as it's out
so as at the end of each year we can see
that interbank assets actually
represented a decent amount of assets
okay now let's look at liabilities so
once again liabilities just like assets
is broken out into different groups okay
so let's overlay some of the breakdown
here so the first one the bottom one the
biggest one tends to be deposits like i
said if we deposit our money in the bank
well that is a liability for citigroup
they're going to have to give us back
that money at some point
then the next group the next largest
group is short-term borrowings and repos
that's actually a bad spot for it let's
move that out of the way and short-term
borrowings and repos it's similar to
interbank lending that we saw on the
asset side but in this case this is the
money that citigroup has borrowed and
has to pay to other banks we know that
because again it's it's on the liability
side st by the way is short term sd is
short for short term
then there's long term debt now this is
actually the closest thing to what you
might see on a traditional company that
has debt if you look at the debt of a
traditional company this is very similar
to that it's a small piece of their
overall liabilities but still i wanted
to mention that now there are some other
liabilities in there but you can see
that the difference between the dark red
bar in the back and the broken up
segments there's a few different things
in there some things relate to taxes
things along those lines but it's
somewhat unimportant then if we're
curious if we were to put behind this
chart if we were to put the total assets
that's the dark green one behind it we
can sort of get an idea of the
difference between assets and
liabilities okay now let's jump into
some key ratios our first ratio up is
the total capital ratio now this goes
all the way back to 2008 and you can see
for citigroup it's been fairly
consistent the most important level here
is eight percent now i've also seen that
a lot of
uh some regulatory bodies so the
interesting part about a bank is that
they have to follow wherever they do
business they have to follow the
regulatory bodies in that country
some say ten percent is the ideal number
some say eight percent we can see in the
case of city well they are more than
cover all of that so as long as they're
above eight or let's say ten percent
well they're considered to be well
capitalized and basically the total
capital ratio is a risk weighted ratio
of the bank's assets so a bank breaks
their assets into different tiers uh
there's tier one which is the best here
that's the strongest here there's tier
two and basically as you go down the
different tiers the the the quality of
the asset gets weaker so
they have to maintain a certain quality
if they're going to take on riskier
assets they have to also take on
stronger assets
that's sort of what this what this ratio
is trying to measure so to look a bit
closer at this well we can look at
cities tier one capital ratio and
basically the tier one capital ratio is
a measure of the bank's strength now
this is uh one that is required
according to bazel three so coming out
of the financial crisis a whole bunch of
rules were put in place to make sure
that a bank properly measures their
amount of risk the tier one capital
ratio
measures the bank's core equity capital
against its total risk-weighted assets
now the key level here is that it must
be at least six percent again we'd like
to see it higher but it must be at least
six percent now in the case of city
since 2007 this hasn't been been a
problem technically 2007 they would have
made it but barely but since then
they've significantly strengthened their
overall balance sheet so this is a good
thing okay next up we've got the tier
one common equity ratio and ideally we
want this one to be above seven percent
so the lower the tier one common equity
ratio is in theory the less the less
capable the bank will be to deal with
financial shocks so if there's a
financial shock to the system and their
tier one common equity ratio is too low
that could in theory jeopardize the bank
so ideally we want to be above seven
percent and we could see back in 2007
they were well below it so citibank even
though they their two other ratios we
looked at were adequate this one is not
adequate so back in 2007 the bank would
have considered to be not well
capitalized today we can see that
they're more than well well enough
capitalized they've got plenty of
capital looking at three of the major
ratios
okay now let's look at the fair value
for citibank stock and as i mentioned at
the start of this video well this kind
of free cash show doesn't really work
for bank so a simpler method to use is
something like price to tangible book
value now we could see the long term
averages above me and we can see that
right now citigroup looks like it's
undervalued compared to its own for
going back to 2012 well it is on the low
end of their press to tangible book
value now one of the reasons priced
attention for book value works so well
is because as we saw we analyzed our
assets we analyzed their liabilities
this gives us a good idea of how much
revenue how much profit the company can
generate and book value is assets minus
liabilities so comparing the current
price to their book value can be a very
smart way to analyze a bank so at the
current level it looks like citigroup
could be a very good buy
ultimately if we believe that the
refresh is something that the company
can pull off and over the long run they
can once again begin to grow their
revenue or continue to grow their
revenue which they've been doing since
about 2015. so if we believe that can
happen citigroup looks like it could be
a good buy now when we look at the chart
we can see that both their five-year and
their 10-year average is about nine a
point nine x so slightly less than one x
right now they're trying to trading at
about point six so it appears there's
about a third upside on this so for me
i'm going to actually add a small
position to my personal investment
portfolio i'll probably make it about a
half position the reason why i hesitate
with citigroup is because they haven't
shown the revenue growth that i'd like
to see they've had some earnings per
share growth thanks to buybacks but i'd
like to see more revenue growth so
i want to get in because the price seems
quite low and frankly i could use some
exposure to the financial sector which i
have none of right now but i think that
right now citigroup is priced at a level
that could look quite good for the long
run now like i said before this is
actually one of the features we want to
add to the website where that way we can
also value banks and insurance companies
price to tangible book value works well
for both so if you'd like to sign up to
get access to the website now we're
going to have the discounted cash flow
calculator up and running in the next
couple weeks and in the months after
that we're going to continue to add to
the website add financial statements add
the ability to value banks reits and
someone the list will just keep going on
so if you'd like to sign up i get a link
right here i've got a link in the
description below and thank you so much
for sticking with me all the way to the
end of the video i really do appreciate
it thank you and i'll see in the next
video