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Citigroup’s not-so-hidden assets deserve respect

A pedestrian passes in front of a Citigroup Inc. bank branch in this photo taken with a tilt shift lens in New York, U.S., on July 6, 2012.

Scott Eells/Bloomberg

Citigroup investors are giving no credit to much of the bank's business. Its global retail bank looks to be worth over $80-billion (U.S.), more than the company's entire market capitalization. Despite the publication on Monday of another set of anemic quarterly earnings, something doesn't add up.

The consumer business is Citi's biggest unit by both revenue and profit. Its return on assets hit a juicy 2.2 per cent for the first six months of this year. Chunky Asian and Latin American operations mean there's growth potential. And ideas already implemented in Asia, such as having just a few mega-branches while otherwise relying on smart ATMs, could bear fruit in other markets.

Assume the global retail bank's 2012 earnings come in at double the showing in the first half and apply a conservative 10 times multiple and the division is worth $83-billion, against Citi's current market value of $79-billion.

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Citi's other businesses include investment banking and the transaction services division, which provides companies with cash management, trade-related and other services and claims 96 per cent of Fortune 500 companies as customers.

Putting the latter on the same 12 times 2012 expected earnings as State Street, a peer in some respects, values it at $44-billion. That's enough to offset the $40-billion drag on valuation that can reasonably be ascribed to Citi Holdings, the vehicle for the bank's remaining unwanted dross, which is on track to lose $4-billion this year.

By that math the investment bank is worth about minus $8-billion. Some wariness is called for with trading and issuance volumes low, new rules yet to be written and the legal fallout from mortgages and the Libor mess still unclear. But attributing a negative value to a unit that has managed a 28-per-cent pretax margin so far this year is harsh.

A credible value for Citi's Wall Street business – at a lower rating than Goldman Sachs' – might approach $40-billion. But to get there would require a 60-per-cent leap in the bank's stock price. The math might just support such a surge, and Citi would still trade well below its book value. But given the state of banking at large, few investors are going to bet on it happening any time soon.

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