Heard on the Street
Sleeping Easier in the Citi
By John Carney
Updated Feb. 6, 2014 2:52 p.m. ET
With concerns over emerging markets keeping many investors up at night, shares of the bank that "never sleeps" have taken a beating. Investors shouldn't toss and turn too much, though.
In one sense, this is understandable. Citi has become a proxy for international, and particularly emerging-market, concerns. That is because it is the most globally oriented of the big U.S. banks. International markets generated roughly 56% of Citi's core revenue compared with about 25% at J.P. Morgan Chase, according to Bernstein Research.
And much of Citi's international business is in emerging markets, which contributed 42% of revenue in 2013 and about 55% of net income, Evercore estimates. Over a third of Citi's loans are in emerging markets.
But just because Citi is big in emerging markets doesn't necessarily mean it has a lot of exposure to the most troubled ones. So, barring contagion that leads to a systemic event, the impact could be more muted than many investors fear.
Let's talk Turkey. This is one mess Citi should be able to sit out. It exited from consumer banking there last year. Evercore estimates the corporate banking business still ongoing was responsible for just 0.3% of Citi's net income last year.
Swing around the globe to Asia. Here, Citi should be able to sidestep troubles in Indonesia and Thailand. While Citi is one of the largest foreign banks in each, the earnings they produce aren't significant to overall performance.
China, of course, matters. Citi has $4.7 billion in consumer loans there. If the broad mix of consumer credit to corporate loans in Citi's international book holds for China, the bank's corporate credit exposure is probably slightly larger than that.
In Latin America, Brazil, Argentina and Venezuela are the main problems. Citi's credit exposure to Venezuela and Argentina are small enough that the bank doesn't break them out.
Citi's biggest emerging-market exposure is to Mexico, with $31.3 billion in consumer loans, and South Korea, with $23.9 billion in consumer loans. Neither country shows up on the 2014 danger lists of most emerging-market bears, though.
On the investment-banking side, recent history might provide some comfort. The onset of taper talk caused disruption in many important emerging-market currencies in the third quarter of 2013. Investors then feared the bank's currency-trading operations could take a big hit. That didn't happen; in fact, it was Goldman Sachs Group GS that got caught offsides.
Citi shares, which started the year trading at about tangible book value, are now at a roughly 13% discount, the only one of the big U.S. banks trading below tangible book. So long as the emerging-markets storm doesn't turn into a typhoon, the stock shouldn't be so far underwater.
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