Sunday, June 15, 2014

Double Down On Citigroup

     Back in March I decided to cut Citigroup to a half position because of the uncertainty regarding it's capital plan rejection.  Although a raise in dividends isn't likely until 2015, it's rejection has largely unaffected the stock, and now there is an opportunity to regain the full position.
On Friday news came out about the pending investigation into Citigroup's part in writing shoddy mortgage backed securities.  Citi offered $4 billion to resolve the allegations, but the justice department is looking for $10 billion.  They also disagree on the severity of Citi's involvement.  Citigroup claims it shouldn't owe nearly as much as the other large banks (BAC, JPM) because it's net dollar amount of sub-prime MBS was a fraction of the amount written by the other large banks (a couple hundred billion less).  The stock dropped 1.4% representing a nice buying opportunity.

Although there are a few headwinds in front of Citi (Mexico fraud, MBS allegations) none of this has affected the ongoing business of Citigroup.  Also, my thesis is intact. Citi performed well in Q1 posting earnings which beat estimates, and cut back expenses above my expectations which should continue moving forward.  They've continued to decline their bad assets in Citiholdings, which has been a drag on earnings.  And volatility has returned to recently calm markets, so trading revenue for the big banks shouldn't decline as much as expected.  Citigroup is set to outperform.

For these reasons, along with the stock being at $47.59, (two cents above original buy-in) I believe we should initiate a full position.

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