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Whitney Tilson is Bullish on Citi

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From Whitney Tilson:

Goldman and Citi (both major holdings of ours) reported earnings last week and the contrast between the two couldn’t have been more stark.  Goldman, as usual, was ahead of its peers in recognizing the slowdown across most of its businesses and cuts costs accordingly: compensation expense, for example, was down 21% for the year.  Citi, as usual (unfortunately), wasn’t nearly as aggressive in cutting costs in its Securities and Banking division – in fact, on a 16% decline in revenues for the year in that division, expenses went UP 2%!  Citi doesn’t break out its revenues and expenses in enough detail to do a real apples-to-apples comparison with Goldman, but we’re heard numerous anecdotal stories about both firms that lead us to the firm conclusion that Goldman is rapidly doing what’s necessary to bring its expense structure in line with the new reality, while Citi is still paying huge guaranteed packages (up to $30 million!) to bankers who aren’t worth anything close to what Citi’s paying them in this environment.

Why is Citi doing this?  Probably some combination of empire building, poor management and incompetence, combined with a highly profitable consumer banking business that offsets losses in the Securities and Banking division – a luxury Goldman doesn’t have.

So why don’t we sell the stock in disgust?  1) The stock today is trading at a 40% discount to tangible book – way too cheap; 2) the consumer banking business is still doing very well; 3) The run-off of Citi Holdings (bad bank) is progressing well; and 4) Citi’s high expenses are a fixable problem – as the article below highlights, Pandit is feeling the heat on this:

At Citi, investors were particularly irked by the growth of expenses, which continues to outpace revenue. For much of the past year, Citi has attributed higher expenses to increased investment spending. That tale is growing tired.

Recognizing this, Citi finance chief John Gerspach said the bank would slow investment spending and look to cut expenses by between $2.5 billion and $3 billion in 2012. But that may not be enough, especially since the bank said that $3.9 billion in 2011 “investment spending”—on areas such as its U.S. consumer business and expansion in Latin America and Asia—wouldn’t be trimmed. Rather, this extra annual expense was baked into future expectations, and cuts would have to come elsewhere.

The need to get expenses under control will become even more urgent if Europe again sends investors to the sidelines. That means the bank’s investment-banking arm, particularly its underperforming equities business, may require drastic surgery.

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