Citi sticker

Citi looks perfectly priced - for more mediocrity

Citigroup's stock looks perfectly priced - for more mediocrity. The mega-bank's $3.9 billion first-quarter profit was no disaster. Unlike JPMorgan, the firm run by Michael Corbat beat analysts' estimates. Its bad bank, Citi Holdings, is no longer much of a drag. And, the bank even managed to utilise a chunk of its substantial tax breaks and thus boost capital. For now, though, shareholders don't have much more to cheer about.

After Monday's better than expected showing, Citi's shares jumped as much as 4.4 per cent. But even with that the bank is trading at just 83 per cent of its tangible book value, the only major financial firm currently stuck at less than its net worth.

The discount makes sense based on Citi's reported earnings. Annualised return on equity for the first three months of the year was 7.8 per cent, below the 10 per cent rule-of-thumb threshold for banks to cover their cost of capital.

Yet, Citi is not the only player with subpar numbers. Bank of America and Morgan Stanley are also saddled by single-digit return on equity. The difference is that those fellow laggards have more tools for trying to change that.

First, the Federal Reserve has approved their plans to increase dividends - fivefold, in BofA's case - or to buy back stock, or both. The former boosts the total return to shareholders, while the latter improves ROE simply by reducing the amount of equity. The Fed nixed Citi's plans to return cash to investors because the regulator wasn't satisfied with the bank's method for measuring and reporting risk.

The latest scandal to hit Corbat's firm underlines that issue. Last month, Citi revealed a $400-million hit at Banamex, its Mexican unit, stemming from fraudulent loans extended to a major supplier of oil giant Pemex. Citi confessed on Monday that it had found another perpetrator, though this one may have cost it less than $30 million. That's a worrying sign for a bank that needed government bailouts to stay afloat in the financial crisis. Fold in its inability to return capital to investors and a lack of options for boosting earnings and it's a stretch for Citi to join peers above book value.