Sunday, January 23, 2011

Citigroup Undervalued

Valuation of common shares in bank holding companies has become a challenge as the amount of data released in SEC filings has increased. Analysts have responded by narrowing their focus to selected metrics such as the current share price divided by tangible common equity per share and net interest margin. An examination of these measures for six (6) of the largest bank holding companies shows significant variation and suggests that at the present time some are undervalued relative to others.

The bank holding company trading at the greatest premium above its tangible book value as of the close on January 21, 2011 was U.S Bancorp (USB) at 2.89 times. At the other extreme, Bank of America (BAC) and Citigroup (C) trade at the smallest premium to their tangible equity, 1.10 times. The second largest premium observed was for Wells Fargo (WFC), which trades at 2.34 times its tangible equity. It was followed by PNC at 1.65 times and JP Morgan (JPM) at 1.49 times.

Net interest margin (NIM) is the difference between interest income and interest expense expressed as a percentage of interest earning assets. It is normally presented on a taxable equivalent basis and is a measure of relative profitability of a banking franchise. An examination of the fourth quarter net interest margins reported last week in the SEC 8-K filings for the above six companies showed WFC had the highest at 4.16%, followed by PNC at 3.93%, USB at 3.83%, C at 2.97%, JPM at 2.87%, and BAC at 2.66%.

This brief analysis suggests that at the present time BAC and C are undervalued relative to JPM, while WFC and USB are overvalued relative to all the other bank holding companies examined.

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