Citi: Cheap Now, But a Laggard Over the Long Haul?

Growth is the cure-all in banking, with the new and more numerous borrowers of today paying for the fewer deadbeats you lent to in years past. In a growing bank, the VPs get to become SVPs, a morale booster, and new opportunities abound.

But when huge losses erode banks’ capital, their growth is constrained (if regulators aren’t out to lunch), and here you can see that Citigroup (C) has had to shrink the most of the big four U.S. banks; JP Morgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) all made big acquisitions to bail out other finance companies during the crisis, pushing their asset levels up.

C, BAC, JPM, WFC Chart

And Citigroup isn’t nearly done shrinking. As the government was extending an extraordinary bailout to Citigroup of $45 billion plus other benefits, the bank was deciding to split in two. One part, which will remain, is its healthier businesses. The other, which is being sold off or liquidated, is the stuff that caused many of Citigroup’s worst losses. The bad part, known as Citi Holdings, still had assets of $421 billion at September 30, down from more than $800 billion during the first quarter of 2008.

Shrinking was a good and perhaps unavoidable decision for Citigroup, but it’s still hard on a bank, or any business for that matter. Between the end of 2007 and the end of 2009, Citigroup got rid of more than 100,000 workers, and that tends to make the survivors a bit jittery. They worry about being the next person fired. And they also fret that their employer has reduced ambitions. Some good people inevitably leave, and some others are less apt to join a shrinking bank.

These are long-term problems, factors that could keep Citigroup from becoming a top-performing bank.

In the shorter-term, though, some see a lot of promise in Citigroup stock. Alone among the big four banks, Citigroup has failed to dramatically snap back from the depths of the crisis.

C, BAC, JPM, WFC Chart

Citigroup trades below its book value.

Citigroup Stock Chart

And while it is doubtful that bank shares will trade at the lofty multiples of book value they once did – higher capital requirements mean higher book values, thus holding multiples down – once Citigroup and others work through their bad loans, the multiples should rise.

Citigroup, for instance, set aside $40 billion for loan losses last year, and a more normal year might be $10 billion. Earlier this week, Citigroup reported third quarter profit of $2.2 billion, or 7 cents a diluted share, but loan losses remain a huge drag. Citigroup wrote off $7.7 billion of loans during the quarter, and would have reported a far smaller profit had it not let its reserves for losses decline.

All the big banks will soon enough be on the mend. And Citigroup, trading beneath the others, may be a relative bargain for now. Longer term, though, Citigroup has a lot of work to do before it’s a top-performing bank.