jebmo’s posthaven

Overview

Trading near of below book value since the end of the global financial crisis, Citigroup Inc. (C) has disappointed investors and has underperformed its peers in the U.S. financials sector. After teetering on the brink of collapse after the financial crisis, Citi has gone through a lengthy process of paring down its sprawling network and reinventing itself as a more focused organization. With a physical presence in 98 markets around the world, Citi is a global industry leader with a geographically diversified footprint. Citi has a significant interest in developed and developing markets in Asia and Latin America, helping to diversify its revenues and risks from the U.S. domestic market.

After nearly a decade of shedding businesses, divesting assets and shoring up its balance sheet, Citi has made significant progress in reinventing the company and refocusing its direction. With the heavy lifting of its restructuring and refocusing complete, CEO Michael Corbat can now focus on his two major priorities for the firm: enhancing return on capital and return of capital. With the positive macro environment of a strong U.S. domestic economy, rising interest rates, tax reform and a favourable regulatory environment, Citi is well positioned to reward shareholders. With these positive catalysts, Citi will be returning value to investors through a massive program of share buy backs, steady dividend increases and ultimately share price appreciation.

Source: Reuters

Institutional Clients Group

Citi operates in two main business segments: Global Consumer Banking (GCB) & Institutional Clients Group (ICG). Citi’s Institutional Clients Group operates an impressive financial network with trading floors in 77 markets, and a physical presence in 98 countries worldwide. Based on its scale, Citi can boast to serving up to 90% of Fortune 500 firms and manages a clearing network of approximately $4T daily. With revenues of just under $35B in 2017, the ICG segment is slightly larger than the GCB business and saw revenue growth of 9% in 2017. In H1 2018, net income increased by 17%; driven primarily by revenue growth and tax reform. Citi is targeting CAGR in ICG revenue of 4% or better through 2020 and anticipates achieving Return on Tangible Common Equity (RoTCE) of 14% or better. Due to the scale and well established network in the institutional space, Citi expects that they can achieve an efficiency ratio of 50% by adding more volume without adding cost and leveraging scale to take advantage of large network advantages.

Global Consumer Banking

Citi’s truly global brand differentiates it from more domestically focused rivals such as (WFC), (BAC) and (JPM). With over 100M customers worldwide, Citi is the lender of choice and top wealth manager in markets around the globe and can boast being the largest issuer of credit cards in the world. This geographical diversification is part of the reason why Citi hasn’t enjoyed the same benefits as its domestic peers resulting from the growth of the domestic U.S. economy. For this reason, Citi is better positioned to continue to benefit from growth in Asia and Latin America, ensuring that it will withstand a slowdown in the U.S. economy better than its peers.

As part of its path towards increasing efficiency, Citi has divested more than $800B in non-core assets, exited consumer markets and reduced head count. Reducing its footprint in global consumer markets by exiting select cities was a significant challenge as the bank had to find a way to leave select markets while still remaining “global”. In the U.S. for example, Citi has concentrated its retail banking in major urban centres such as Washington DC, Chicago, Miami, San Francisco, New York and Los Angeles, while exiting less desirable, less profitable cities.

Results in this segment have been positive, with Citi experiencing 4% growth in Global Consumer Banking revenue for 2017. For the six months ended in June 2018, revenue is up 5% over the period, with net income up an impressive 26% compared to the first half of 2017. On a geographic basis, net income growth for the first half of 2018 was up 23% in North America, 27% in Asia and 39% in Latin America compared to the year prior. Exposure to these developing economies will offer strong loan growth and good margins going forward for the Global Consumer Banking segment. According to the firm’s estimates on earnings growth for 2018 and beyond, GCB should deliver ~2/3 of earnings driven improvement, with ICG contributing the remaining ~1/3. Citi’s leverage to emerging markets in its GCB business is a significant driver of this growth.

Improving Results and Continued Growth

Despite continued weakness in the share price, Citi’s operating results have been improving. Since 2008, Citi has been working to refocus its businesses, execute on strategy and achieve better operating results. Improving its operating results will be key to regaining investor confidence and expanding its earnings multiple. In the second quarter of 2018, Citi reported a 16% increase in net income on a 2% increase in revenue YoY.

Source: Citi Q2 2018 YoY Results

At approximately 0.98, Citi’s price to book ratio has also improved, up from a 5-year average of 0.8. Likewise, return on assets (ROA) is nearing 1% and is up 25bps over 2012-2017. Another positive efficiency indicator for Citi is its demonstrated improvement in revenue per employee. Since 2015, Citi has simultaneously decreased head count from 231K to 209K (as of 2017) while increasing revenue per employee from $324K to $349K.

Data Source: Statista

Like its peers, Citi has benefited from positive changes to the firm’s effective tax rate. For the second quarter of 2018, Citi’s effective tax rate was 24.3%, compared to 31.6% in the second quarter of 2017. Despite its leverage to emerging markets, Citi’s U.S. domestic exposure is significant, making it a major beneficiary of U.S. tax reform. In the domestic U.S. market, Citi has 9.1M customers and $182B in deposits. Tax reform, coupled with a strong U.S. economy and low unemployment will continue to drive positive results for Citi’s domestic business.

Source: American Banker

As a sizeable holder of domestic U.S. deposits, Citi will benefit from rising interest rates in the United States. With 3/4s of Citi’s interest rate sensitivity driven by changes in U.S. rates, the bank should enjoy net interest margin improvements as the Federal Reserve increases rates. According to Eric Compton of Morningstar, Citi’s net interest margin should improve to approximately 3.1% by 2022,up from 2.7% in 2017. Citi appraises that future rate actions should contribute 10% to EPS growth towards 20202 with ~40% coming from improved business performance and ~50% from share repurchases. The firm suggests that these factors will contribute to robust EPS growth of ~$9/ share in 2020.

Source: Citi Investor Day

Achieving a $100/Share Valuation

Over the last 6 months, Citi has traded in a narrow range between the mid 60s and the mid 70s, approximately 10% down from its January 2018 high of $80.70. Given the tailwinds in 2018, its difficult to see why the stock has underperformed. With rising interest rates, a strong domestic economy, positive CCAR results and a lower effective tax rate all working in Citi’s favour, there is a compelling case that the share price has a long runway.

In the 2017 investor day presentation, Citi CFO, John Gerspach suggests that even at 1.0 P/B share price should increase ~50% from July 2017 levels. With a closing share price of $68.03 as of July 25, 2017 (Citi Investor Day), Gerspach implies a 2020 valuation at just over $102/share. This valuation assumes RoTCE ex. DTA (Deferred Tax Assets) of 13% and 1.3x multiple on $145B of TCE (Tangible Common Equity) deployed in the business. A valuation at this level would include a forward P/E multiple of ~10x and ~1x 2020 BV/share. A share price of ~$102 in 2020 would suggest a 41% upside over the next ~2 years, or an annual total return of approximately 23%.

Source: Citi Investor Day

Morningstar expects that RoTCE will increase to 12.5% in 2019 on its way to Citi’s 2020 goal of 13%. With this RoTCE improvement coupled with a boost in EPS from earnings growth and buy backs, annual share price growth of ~20% looks achievable. The 30 analysts who cover the stock currently have an average one year price target of $84.62, for a one year total return of ~19.5%. Current analyst recommendations from Reuters include: 12 buys, 10 outperforms, 7 holds and 1 underperform suggesting that analysts see a value opportunity as well as a visibility towards significant share price appreciation. Given these estimates, a 2020 share price of ~$100 seems reasonable.

Data Source: Reuters

Returning Capital to Shareholders

By virtue of Citi’s status as a systematically important financial institution, Citi’s capital plan is subject to approval from the Large Institution Supervision Coordinating Committee (LISCC) through the Federal Reserve. Citi achieved positive results in the 2018 Federal Reserve Comprehensive Capital Analysis and Review (CCAR) "stress test". With this affirmation from the Federal Reserve that Citi’s capital availability and financial strength is more than adequate to absorb losses in severely adverse scenarios, Citi has the green light to continue on with its plan to return massive amounts of capital to shareholders. With a stated intention to return at least $40B of capital to shareholders through dividends and share repurchases over the 2018 & 2019 CCAR cycles. Having achieved stability and satisfied the CCAR requirements, Citi now plans to start reducing its CET1 Capital Ratio to required levels in order to drive additional growth.

Source: Citi Q10 Filing

Returning capital to shareholders has been the signature policy of Citi’s rebuilding phase over the last few years. Citi is currently well into its commitment of buying back $17.6B in shares and on track to return $4.4B in dividends for a total of $20B in capital returned to shareholders over the 2018 CCAR cycle. In 2017, the result of $15.6B in buy backs was a 5% decline in average diluted shares outstanding and 6% growth in EPS, the 2018 results should be even more impactful.

The impact of share buy backs on such a large scale has been a steady boost in EPS. Over the last 2 years, Citi has increased EPS at a CAGR of 13%. According to Citi’s estimates, EPS should rise to $7.49, a 13.8% increase. Share buy backs over the last few years have been especially valuable for investors as the stock has continued to trade at or below its book value, allowing Citi to buy back their own stock at a discount to tangible book value. The impact of share buy backs over the next few years will continue to be positive for shareholders but will have diminishing value as the share price increases.

Source: Citi Investor Data

Dividend Growth

While Citi’s share price has been slow to respond to the strong catalysts for the company’s earnings, the generous dividend increases have rewarded shareholder’s patience. With a paltry dividend of just $0.01 per quarter as recently as 2015, Citi’s dividend has increased dramatically over the last three years with a growth rate of 188.40% annually. With a 2018 increase of ~40%, the distribution of $0.45/quarter now represents a respectable yield of ~2.50%, comparing favourably to the sector average of 2.03%.

Future dividend increases will be supported by earnings growth and will likely be an increasingly important part of Citi’s plan to return capital to shareholders. As the share price rises, dividend increases will be a more attractive option for returning capital than share repurchases. The robust growth in Citi’s dividend is evidence that both Management, and the Federal Reserve, through the CCAR have confidence in Citi’s potential to continue earning growth.

Source: Citi Investor Data

Risk Analysis

Despite achieving positive results, Citi stock has yet to hold onto any momentum and as a result has underperformed its peers. CEO, Michael Corbat still has a number of challenges ahead to convince investors that the firm can achieve its stated operating goals. By virtue of Citi’s massive global scale, the bank’s sheer size and geographic breadth present a unique challenge for Citi’s CEO as he works towards executing strategy across sprawling business segments. This execution risk is the most obvious of Citi’s challenges going forward as the milestones required to achieve the key performance indicators set out in Citi’s own 2020 valuation estimates require a coordinated effort across its geographically diverse business segments. Failing to bring down its efficiency ratio or deliver on its RoTCE expectations could weigh on the share price. External threats such as Citi’s tendency to become entangled in costly litigation or its exposure to emerging market volatility are both factors that have potential to negatively impact EPS growth.

Key Takeaways

With all that Citi has achieved in its turn around over the last 10 years, the risks facing the firm seem manageable when considered alongside the company’s numerous positive catalysts. Trading near its book value, Citi is the last great value opportunity in the U.S. banking sector. With a backdrop of rising interest rates, tax reform, lucrative emerging markets exposure and a robust U.S. economy, Citi is poised for healthy revenue growth. EPS should grow ~15% annually to 2020 as Citi continues to return capital to shareholders and reduce its number of shares outstanding. These tailwinds coupled with improving operating results will improve valuation and instill investor confidence. This compelling value opportunity offers investors of Citigroup Inc. a total return potential of ~23% annually with visibility towards continued dividend growth and a share price of ~$100 in 2020.

Disclosure: I am/we are long C.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Roughly speaking, Gödel’s Incompleteness Theorem states that there are true mathematical statements that cannot be proven. When I was in 11-th grade, my geometry teacher Mr. Olsen, my friend Uma Roy, and I spent five weeks reading through Gödel’s original proof of the theorem. Why did it take so long? Partly because Uma and I were high-school students. Partly because Gödel was a less-than-talented writer. But mostly because the proof is actually pretty hard.

That might seem surprising, since it’s easy to present a one-paragraph summary of essentially how the proof works: Gödel begins by constructing a mathematical statement essentially equivalent to the sentence,

This statement cannot be proven.

Then Gödel considers what would happen if the statement were false. That would mean that the statement could be proven. But any statement that can be proven must be true, a contradiction. From this Gödel deduces that the statement must be true. But, since the statement is true, it follows that the statement cannot be proven. Note that this final statement is not a contradiction. Rather, it’s a proof of Gödel’s theorem.

So what makes the actual proof so hard? The trickiness comes from the fact that what might sound like a valid mathematical statement in English often isn’t (especially when the sentence is self-referential). Consider, for example, the sentence,

This sentence is false.

The sentence is nonsensical: it cannot be false (since that would make it true) and it cannot be true (since that would make it false). And it certainly cannot be written as a formal mathematical statement.

Here’s another example (known as the Berry paradox):

Define to be the smallest positive integer that cannot be defined in under words.

This might look like a valid mathematical definition. But again it’s nonsensical. And, importantly for the sanity of mathematics, no analogous statement can be made mathematically formal.

Even statements that use math symbols can be nonsensical:

.

(i.e., is the set of sets which are not elements of themselves.)

This is again a nonsensical definition (known as Russell’s Paradox). In particular, once we’ve defined we can ask ourselves, does contain itself? If it does, then cannot be a member of , a contradiction; and if it doesn’t, then will be a member of , a contradiction.

The point of the above three examples is that, if you want to prove a theorem about mathematical statements, then you have be extremely careful that what you’re proving the theorem about really is a mathematical statement. And, indeed, from the 46 definitions at the start, to the remarkably dense proofs at the end, Gödel’s original paper is nothing if not a massive exercise in carefulness.

When people think of endangered species, they tend to think of the giant panda, the blue whale, or maybe the snow leopard. We need to add another group to the list: women named Heather.

A Quartz analysis of US baby-name data that goes back to 1880 finds that no name in history has become so popular and then flamed out quite like Heather.

At its peak in 1975, more than 24,000 girls were named Heather, making it the US’s third most popular girls name, after Jennifer and Amy. In 2017, it was the 1,129th most popular name, given to only 219 girls born that year.

Jennifer and Amy also have fallen in popularity, but not nearly as sharply as Heather.

Laura Wattenberg is the preeminent expert on US naming trends. Her Baby Name Wizard website is a trove of insights on the fascinating choices parents make when naming their kids. We asked her what in the heck happened to Heather.

Wattenberg says the rise and fall of Heather is exemplary of the faddish nature of American names. “When fashion is ready for a name, even a tiny spark can make it take off,” she says. “Heather climbed gradually into popularity through the 1950s and ’60s, then took its biggest leap in 1969, a year that featured a popular Disney TV movie called Guns in the Heather. A whole generation of Heathers followed, at which point Heather became a ‘mom name’ and young parents pulled away.”

Another possible cause of the name’s extreme downfall is the popular 1988 movie Heathers—the characters named Heather in the movie are evil. The data journalist Reuben Fischer-Baum examined this possibility for the website Deadspin, and found that while the movie was likely a contributor to the speed of the decline, the name was on its way out anyway.

While names come and go, Heather’s trajectory is special. Quartz examined the names that were once among the top five for girls or boys and then fell out of the top 1,000. Among the eight names that met this criteria, which all happened to be girl names, Heather had the fastest descent.

These names went from the top 5 to outside of the top 1,000 faster than any others

Heather is unlikely to make a comeback in the near term, explains Wattenberg, because its sound is out of step with the times. “Current style favors liquid sounds dominated by long vowels,” she says. Liquid sounds are those that involve using the tip of the tongue and create air flow through the mouth. Examples of names with these characteristics include currently popular names like Liam, Noah, Aria, and Amelia. Shannon and Chad are good examples of names that, like Heather, don’t fit the current style due to their muted vowels.

If Heather is to make a comeback, it likely wouldn’t happen for another couple of generations. Names that return to popularity tend to do so after a 100-year cycle. For example, the name Clara, popular in the late 19th century, is now returning to prominence. When the current crop of Heathers are great-grandmothers, we may see a similar resurgence.

It had been hiding in plain sight. The original letter — long thought lost — in which Galileo Galilei first set down his arguments against the church’s doctrine that the Sun orbits the Earth has been discovered in a misdated library catalogue in London. Its unearthing and analysis expose critical new details about the saga that led to the astronomer’s condemnation for heresy in 1633.

The seven-page letter, written to a friend on 21 December 1613 and signed “G.G.”, provides the strongest evidence yet that, at the start of his battle with the religious authorities, Galileo actively engaged in damage control and tried to spread a toned-down version of his claims.

Many copies of the letter were made, and two differing versions exist — one that was sent to the Inquisition in Rome and another with less inflammatory language. But because the original letter was assumed to be lost, it wasn’t clear whether incensed clergymen had doctored the letter to strengthen their case for heresy — something Galileo complained about to friends — or whether Galileo wrote the strong version, then decided to soften his own words.

Galileo did the editing, it seems. The newly unearthed letter is dotted with scorings-out and amendments — and handwriting analysis suggests that Galileo wrote it. He shared a copy of this softened version with a friend, claiming it was his original, and urged him to send it to the Vatican.

The letter has been in the Royal Society’s possession for at least 250 years, but escaped the notice of historians. It was rediscovered in the library there by Salvatore Ricciardo, a postdoctoral science historian at the University of Bergamo in Italy, who visited on 2 August for a different purpose, and then browsed the online catalogue.

“I thought, ‘I can’t believe that I have discovered the letter that virtually all Galileo scholars thought to be hopelessly lost,’” says Ricciardo. “It seemed even more incredible because the letter was not in an obscure library, but in the Royal Society library.”

Ricciardo, together with his supervisor Franco Giudice at the University of Bergamo and science historian Michele Camerota of the University of Cagliari, describe the letter’s details and implications in an article in press at the Royal Society journal Notes and Records. Some science historians declined to comment on the finding before they had scrutinized the article. But Allan Chapman, a science historian at the University of Oxford, UK, and president of the Society for the History of Astronomy, says “it’s so valuable — it will allow new insights into this critical period”.

The first and last page of Galileo’s letter to his friend Benedetto Castelli. The last page shows his signature, “G. G.”.Credit: The Royal Society

Mixed messages

Galileo wrote the 1613 letter to Benedetto Castelli, a mathematician at the University of Pisa in Italy. In it, Galileo set out for the first time his arguments that scientific research should be free from theological doctrine (see ‘The Galileo affair’).

He argued that the scant references in the Bible to astronomical events should not be taken literally, because scribes had simplified these descriptions so that they could be understood by common people. Religious authorities who argued otherwise, he wrote, didn’t have the competence to judge. Most crucially, he reasoned that the heliocentric model of Earth orbiting the Sun, proposed by Polish astronomer Nicolaus Copernicus 70 years earlier, is not actually incompatible with the Bible.

Galileo, who by then was living in Florence, wrote thousands of letters, many of which are scientific treatises. Copies of the most significant were immediately made by different readers and widely circulated.

His letter to Castelli caused a storm.

Of the two versions known to survive, one is now held in the Vatican Secret Archives. This version was sent to the Inquisition in Rome on 7 February 1615, by a Dominican friar named Niccolò Lorini. Historians know that Castelli then returned Galileo’s 1613 letter to him, and that on 16 February 1615 Galileo wrote to his friend Piero Dini, a cleric in Rome, suggesting that the version Lorini had sent to the Inquisition might have been doctored. Galileo enclosed with that letter a less inflammatory version of the document, which he said was the correct one, and asked Dini to pass it on to Vatican theologians.

His letter to Dini complains of the “wickedness and ignorance” of his enemies, and lays out his concern that the Inquisition “may be in part deceived by this fraud which is going around under the cloak of zeal and charity”.

Galileo’s celestial ideas were deemed heretical and he lived his final nine years under house arrest.Credit: DeAgostini/Getty

At least a dozen copies of the version Galileo sent to Dini are now held in different collections.

The existence of the two versions created confusion among scholars over which corresponded to Galileo’s original.

Beneath its scratchings-out and amendments, the signed copy discovered by Ricciardo shows Galileo’s original wording — and it is the same as in the Lorini copy. The changes are telling. In one case, Galileo referred to certain propositions in the Bible as “false if one goes by the literal meaning of the words”. He crossed through the word “false”, and replaced it with “look different from the truth”. In another section, he changed his reference to the Scriptures “concealing” its most basic dogmas, to the weaker “veiling”.

This suggests that Galileo moderated his own text, says Giudice. To be certain that the letter really was written in Galileo’s hand, the three researchers compared individual words in it with similar words in other works written by Galileo around the same time.

Chance discovery

Ricciardo uncovered the document when he was spending a month this summer touring British libraries to study any handwritten comments that readers might have left on Galileo’s printed works. When his one day at the Royal Society was finished, he idly flicked through the online catalogue looking for anything to do with Castelli, whose writings he had recently finished editing.

One entry jumped out at him — a letter that Galileo wrote to Castelli. According to the catalogue, it was dated 21 October 1613. When Ricciardo examined it, his heart leapt. It appeared to include Galileo’s own signature, “G.G.”; was actually dated 21 December 1613; and contained many crossings out. He immediately realized the letter’s potential importance and asked for permission to photograph all seven pages.

“Strange as it might seem, it has gone unnoticed for centuries, as if it were transparent,” says Giudice. The misdating might be one reason that the letter has been overlooked by Galileo scholars, says Giudice. The letter was included in an 1840 Royal Society catalogue — but was also misdated there, as 21 December 1618.Another reason might be that the Royal Society is not the go-to place in the United Kingdom for this type of historical document, whose more natural home would have been the British Library.

The historians are now trying to trace how long the letter has been in the Royal Society library, and how it arrived there. They know that it has been there since at least the mid-eighteenth century, and they have found hints in old catalogues that it might even have been there a century or more earlier. The researchers speculate that it might have arrived at the society thanks to close connections between the Royal Society and the Academy of Experiments in Florence, which was founded in 1657 by Galileo’s students but fizzled out within a decade or so.

For now, the researchers are stunned by their find. “Galileo’s letter to Castelli is one of the first secular manifestos about the freedom of science — it’s the first time in my life I have been involved in such a thrilling discovery,” says Giudice.