One storied value investor recently traded out of one bank in order to increase an investment in another.
Edgar Wachenheim III’s Greenhaven Associates exited its
Bank of America
(ticker: BAC) investment in the third quarter, and bought more
Citigroup
stock (C). Greenhaven, which manages $7.7 billion of U.S.-traded securities, disclosed the stock trades, among others, in a form it filed with the Securities and Exchange Commission.
Bank of America stock slipped 17% in the first three quarters of 2023, a bit better than the 18% drop in the
SPDR S&P Bank
exchange-traded fund (KBE), of which Bank of America is a component. So far in the fourth quarter, shares are down 4.8%, while the ETF has dropped 1.5%.
At the end of the second quarter, Bank of America was sitting on $105.8 billion of losses on a $614 billion portfolio of mostly agency mortgage securities, and that the losses likely widened in the third quarter as rates rose.
Greenhaven owned more than 1.2 million Bank of America shares at the end of June, but sold them all by the end of September.
“We sold our Bank of America because we wanted to own more Citigroup, but did not wish to add to our total dollar investment in financial-services companies (for sake of diversity),” Wachenheim wrote in an email.
Greenhaven bought 2.2 million more Citigroup shares to end September with 13.1 million shares of the bank.
Citigroup stock slid 9.1% in the first nine months of 2023, and so far in the fourth quarter, shares are down 1.4%.
Wachenheim, who has a three-decade record of delivering an average annual return of 19% for Greenhaven portfolios before fees, concedes Citigroup isn’t best in class. “The bank’s overall quality is below
JPMorgan Chase
JPMorgan Chase
‘s [JPM], and some of the other leading banks, but we strongly believe its quality is much better than its reputation,” he wrote.
“We estimate that 30%-35% of Citi’s profits come from its ‘payments’ business (which it calls Treasury and Trade Solutions),” Wachenheim added. “This is a very good service business that generates fee income and deposits—and Citi is a leader in payments and enjoys an excellent reputation for quality,” Wachenheim added.
“An estimated another 5% of earnings comes from securities services, also a good business. And, another 5%-10% of earnings come from investment banking, where Citi remains strong in fixed income (the old Salomon Brothers). And, Citi has a smaller but well positioned wealth-management business (particularly strong in Asia) that accounts for an estimated close to 10% of profits.
“Thus, an estimated 50%-60% of Citi’s profits come from good, largely fee generating businesses. Continuing, markets (again the old Salomon Brothers) accounts for 20%-plus of earnings in a normal year—and thus the traditional banking business (which is a riskier, highly competitive business) accounts for less than 30% of profits,” Wachenheim wrote.
“Other positives are the new management under [CEO] Jane Fraser, and the steps the new management is taking to improve the bank,” Wachenheim wrote.
Fraser announced a broad reorganization in mid-September. “We have taken hard, consequential, tough decisions here,” she said at the time. “They are not going to be universally popular within our bank. It’s going to make some of our people very uncomfortable.”
The bank is getting rid of its split into two divisions and eliminating the international layer overseeing global regions. The heads of the five businesses Fraser has made the bank’s focus will all report directly to her.
Where does Wachenheim think Citigroup stock, which closed at $40.57 on Friday, could head from here? As high as $120.
“If Citi earns $11-$12 per share, and if its shares sell at 10 times earnings (which is our hope), the profits from owning the shares will be very large,” Wachenheim wrote. “There is the old expression that one should buy straw hats in winter. Well, Citi seems to be suffering from a blizzard of criticism over its control problems and related high costs to solve the problems. The blizzard should end—and spring and summer should follow.”
Inside Scoop is a regular Barron’s feature covering stock transactions by corporate executives and board members—so-called insiders—as well as large shareholders, politicians, and other prominent figures. Due to their insider status, these investors are required to disclose stock trades with the Securities and Exchange Commission or other regulatory groups.
Write to Ed Lin at [email protected] and follow @BarronsEdLin.
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