Monday, October 4, 2010

Credit Agricole's Mike Mayo Maintains UNDERPERFORM Rating on Citigroup, Raises Price Target (C)

 UPDATE: "Credit Agricole's Mike Mayo's Meeting With Citigroup: Non-event (C)"

The stock is down a nickel at $4.04.
First up Barron's Stocks to Watch Today blog:
CLSA analyst Mike Mayo met with Citigroup (C) management on Friday, a long-awaited visit preceded by back-and-forth bickering by Mayo and Citi over a variety of cricisms by the analyst, including the validity of Citi’s accounting. (I previewed the meeting here on Thursday.)

Today comes Mayo’s follow-up report, titled, “Paradise Lost: Will It Be Found?”

Bottom line today, Mayo maintains his “Underperform” rating on Citi shares, but he raised his price target to $4 from $3.50.
The good news, writes Mayo, is Citigroup is looking more and more like the old, pre-1998 Citicorp, a slimmed down “good bank,” with $1.5 trillion in assets. Its three businesses of investment banking, consumer banking, and transaction processing give Citi unique “breadth and depth,” he argues.
But Mayo’s no less concerned now than he was before the meeting about Citi’s approach to risk management.
For every $3 of profit the last decade, Citi gave back a dollar because of regulatory, legal, financial or accounting losses, observes Mayo. That means Citi’s main problem is how not to “mess up,” in Mayo’s view.
The so-called bad bank, Citigroup Holdings, with half a trillion in assets, can’t be excluded from the picture. It represents the five bad holes within Citi’s 18-hole golf game, in his view.

Mayo offers the following observations after talking with CEO Vikram Pandit and CFO John Gerspach:

Pandit and Gerspach say Citi’s capital spending has been lower in recent years because of massive layoffs and because it was retrenching after big spending on data centers in 2006 through 2008. Mayo said that makes sense, but he still thinks the firm needs to spend more than its current run rate of $1 billion.
Citi’s focus on overseas markets is a big plus for the bank, and he’s reassured somewhat by Pandit regarding the firm’s management in those areas. But he came away wondering why places like Brazil and China have separate management teams, not some unifying “emerging markets” unit, as it did backat the start of the last decade....MORE
From CNBC:
Mike Mayo on His Meeting With Citigroup
"Not as Negative" is the headline comment from banking analyst Mike Mayo following his meeting with Citigroup executives on Friday. Two years in the making, the meeting has sparked headlines and seems to have pushed the stock back over $4 per share.

Following are responses from CSLA analyst Mike Mayo sent in reply to questions submitted by our reporter, Mary Thompson.
Key takeaway?
Not as negative — the Citi story looks better on paper, but there’s still immense execution concerns
Key lingering question?
Will Citi ever reach its vast potential? The potential of Citi’s global franchise has been talked about for decades. Yet, each decade, Citi’s shortfalls come not from a lack of growth but because they mess up
What was more positive about the strategy than expected?
  • Using the past for strength: I like how Citi looks to its past — Citicorp [C  4.04    -0.05  (-1.22%)   ] of the late 1990s pre-merger with Travelers — to show a general direction and the potential to generate higher returns.
  • Premium brand in Asia: Their body language around Asia was relaxed...they like talking about this...I had the 14 person CLSA Asian bank team check Citi in Asia and they confirmed that Citi is strong in the region
  • Potential of global integration: the best business is global transaction services — if the rest of the firm ever got to this degree of integration, Citi could capture a lot more revenues
What was more negative about the story than expected?
  • Cap-ex – I’m not buying it: Citi said that it’s level of investment is fine, but I think that they need to do more … I don’t think that Citi can admit this due to competitors, but the crisis period caused them to cut back too much. Take ATM technology here in New York City. Walter Wriston and John Reed started the ATM revolution and now Citi’s competitors are lapping them in terms of functions.
  • New team, again: Management talks about the new team, but Citi has had 30 major management changes in the past 12 years, so we’ve heard this story before
  • Financial targets: Citi’s ROA is 90 basis points since they were formed in 1998 and they look for 125-150 basis points excluding the non-core part — I’d rather see 100 basis points in ROA if it meant more consistency
Here's the video: