3 Reasons Citigroup Should Be Encouraged by the Red Sox
Source: R.L. Celebre.
Down on its luck and coming of a dismal 69-93 season, the Red Sox fired its manager and traded away three former all-stars, essentially hitting the reset button on the franchise.
This would normally be a sign of rebuilding, but the Red Sox found lower-cost alternatives to its former high-priced talent and have dumbfounded analysts with their appearance in this year's World Series.
But what does this have to do with Citigroup ?
Citigroup and the Boston Red Sox have a lot in common. Don't believe it? Well, stand back and allow me to show you just how much this World Series competitor and struggling banking giant are alike.
Show me the money
In baseball, being well capitalized gives teams financial flexibility and allows them to hold on to their most precious assets: their players. In Boston's case, that meant Dustin Pedroia's $100 million deal.
Capital is leveraged in a similar way for banks -- more capital not only provides safety and security but gives them the leeway to hold onto key assets. Total capital ratio, as shown in the table below, is a notable indicator of a bank's capital level.
Bank of America
Source: Company filings.
Citigroup may have 99 problems, but capital isn't one. According to current regulatory standards, for a bank to be deemed "well capitalized," it must have a total capital ratio of at least 10% -- Citigroup obviously meets this standard with flying colors. Both JPMorgan and Bank of America also more than meet this standard, but Citigroup's level tops them both.
Get out your brooms
Call them what you will, players are assets, and they can either perform or not. This holds true for banks as well. Over time, it's hard for a bank to succeed if too many of its loans don't get paid back.
Last 12 Months
Bank of America
Source: Capital IQ.
When loans don't perform, much like when players fail to perform, the CEO -- or in baseball, the manager -- often bears the brunt of the blame. In the midst of the 2008 financial crisis, a number of big bank CEOs got the ax. At Citigroup, specifically, Chuck Prince was let go in 2007 and succeeded by Vikram Pandit, who looked to be righting the ship before resigning. He was replaced by Michael Corbat in 2012.
Over the past decade, the CEO position at Citi has been far from stable, but now Corbat has flipped the script and is taking the ax to his own company. The Citi CEO, continuing what former CEO Pandit had started, has helped cut down the size of Citi Holdings -- where legacy (a.k.a. lousy) loans are held -- by $302 billion since 2009 according to company filings.
Investors should look for this trend to continue, especially with new and stricter regulations looming, as banks attempt to strengthen their core businesses rather than pursue riskier avenues.
What does it cost to win?
Cost-to-win ratio is a simple baseball metric to judge how much a team spends per win. The 2012 Red Sox, for instance, paid roughly $2.5 million per win, compared to just $1.6 million this year -- and even less if you include the playoffs.
We're talking about efficiency here, folks, and the less you can spend per win the better. The same goes for Citigroup. If you divide total expenses by revenue, we get a bank's efficiency ratio. The lower that number the better, we want to see those expenses low, and that revenue nice and high.
Bank of America
Source: Company filings.
These aren't particularly favorable numbers for Citigroup, but they're a bit misleading if you ask me. In the process of restructuring, things can get messy, and that's what I think we're seeing here. With lots of moving parts in the business right now, expenses may be higher today than they will be in the future. If I'm right here, look for steady improvements in Citigroup's profitability.
Is Citigroup World Series bound?
The 2013 Boston Red Sox may be remembered as one of the greatest turnaround stories of all time. A World Series title will only cement that further.
While Bank of America and JPMorgan have also been making substantial strides, in my opinion, if Citigroup can continue to allocate capital appropriately and sell assets that aren't working while being as efficient as possible, it will return to its former glory and have a greater potential upside than its U.S. competitors.
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The article 3 Reasons Citigroup Should Be Encouraged by the Red Sox originally appeared on Fool.com.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Bank of America. It also owns shares of Citigroup and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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