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August 11, 2014 Sebastian J. Mollo

BAC & C Analysis: Dont Bank on Todays Fines, but on Tomorrows Global Revenues
In this day and age, the U.S. Department of Justice appears to be majority shareholder in
most large banks in view of the governments capacity to extract value from them through the
threat of legal actions. When it comes to comparing long-term growth prospects for two
American financial behemoths, Citigroup Inc. (NYSE:C) and Bank of America Corp.
(NYSE:BAC), however, it appears that a clear winner emerges for investors who do not enjoy
the advantages of government coercion. Now that the issue of mortgage-backed securities
liability has been mostly settled with the Department of Justice, and the regulatory fog is
dissipating, it may be a great time to focus on the long-term return prospects for these too-big-to-
fail institutions.
Global Potential
One crucial area to evaluate future profitability of large financial institutions is their
global footprint. Emerging markets may be poised for greater growth than developed markets;
concomitantly, a larger sector of their population still has no access to financial services. This
provides a significant upside for banks that are better positioned to satisfy this demand.
Through Citigroup's Global Consumer Banking (GCB) division, the bank operates in 100
countries globally, far more than most of its U.S. competitors. Although there is an inherent risk
in the bank's exposure to developing countries, for instance like the recent loan fraud scandal at
its Banamex subsidiary, improved internal controls may help prevent new incidents. On the other
hand, Bank of America generates 90% of its revenues from the U.S. domestic market and the
banks leadership is pursuing a mostly domestic expansion strategy moving forward. A domestic
market focus means less diversification and constraints in terms of size and the type of activities
the bank can engage in.
A key financial metric used to assess the profitability of financial service companies is
Return on Average Tangible Common Shareholders' Equity (RoTCE); it measures the return on
the capital the owners of common stock would receive in the event of the banks liquidation. The
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table below, extracted from the second quarter 2014 financial results, highlights the outstanding
RoTCE of 18% in Citigroups GCB division.

On a constant dollar basis, Citigroups international core operating revenues were up 1%
versus the second quarter 2013 as Latin America revenue growth offset declines in Asia and
EMEA. The net credit loss rate for the overseas operations was 1.97% of average loans in the
second quarter 2014, compared to 1.74% in the same period of the prior year. These figures
demonstrate how lucrative and resilient the banks diversified overseas operations are.
End of a Cycle
The market has been signaling the end of a commodities bull cycle with softening prices
and weaker currencies in countries that rely on them for exports. Obviously, this is a concern for
Citigroup where a big part of its operation are in weaker overseas and emerging markets. This
fact makes investors a little nervous given the FX and operational exposure of the bank. An
American bank with strong global presence like Citigroup, however, may be the first to recover
and profit from the higher long-term growth rates expected from these regions. In this case, it is
wise to follow Warren Buffets premise be fearful when others are greedy and greedy when
others are fearful.
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The Bottom-line
In March 2013, shortly after becoming Citigroups CEO, Michael L. Corbat stated that
the bank planned to boost its overall RoTCE to 10% or higher by 2015. While the bank
disappointed investors by posting weak numbers that made this goal difficult to achieve,
Citigroups second quarter 2014 RoTCE stands at 8%, while the comparable figure for Bank of
America is 7.14%. Although Citigroup beats Bank of America by a small difference, the
outstanding GCB profitability may indicate that this divergence is likely to become wider in
coming years.
Another key metric, tangible book value (TBV) per share is calculated as the total
tangible equity divided by the total number of outstanding shares. TBV per share provides a
good estimate of the minimum value of a bank. Citigroups TBV per share at the end of the
second quarter 2014 was $56.89 while the stock price closed at $48.39 on August 11. For the
same period, Bank of Americas TBV per share was $14.24 while the stock price closed at
$15.22 on August 11. From a value investors perspective, Citigroup may offer better long-term
returns if the stock price catches up with its potential intrinsic value.
Large financial institutions are complex businesses, and much depends on the quality of
the assets on the balance sheet. With this caveat, Citigroup offers better growth and value
prospects than Bank of America and it is likely to outperform many of its U.S.-focused peers in
the long-term.
Disclosure: I do not own any of the securities mentioned in the article.