Citigroup (NYSE: C) has been trading at a discount to book value for quite a while, and has seen it’s stock price battered during and since the financial crisis of 2008. In the supermarket model that is Citigroup, disseminating which business units are valuable and which are sagging are quite difficult – but, insight into this can provide important insight into the future of the firm, as they return to a core line of business.
Nomura bank analyst Glenn Schorr today turned peeks under the hood of Citigroup’s Global Transaction Services unit, which he calls the bank’s “least-understood and most-underappreciated business.” Global transaction services include under-the-radar back office support services to help companies, the public sector and investment funds manage cash, trade financing and a raft of other financial transactions.
Schorr wrote “While the IB, Cards and Retail Banking get most of the attention, GTS is a $10bn-a-year revenue business with low capital requirements (just 6% of Citi’s assets reside here), generous 40-50% pretax margins, very attractive returns (ROAs of around 500bps), and is a critical source of liquidity for the rest of the Citi franchise (45% of the firm’s deposits are generated here)….As few companies have GTS’s scale and cutting-edge platform, which is able to handle an increasingly complex and more global world, we think it can accumulate more market share and produce double-digit growth. Net income is spread out across the world, with about 16% from North America, one-third from Asia and one-third from Europe, the Middle East and Africa, according to the Nomura report. The GTS unit pulled in $9.79 billion of total revenue in 2009, according to financial reports, and net income of $3.7 billion.”
What is interesting about the business unit is that the GTS business did well even as other pieces of the bank struggled during the financial crisis. Since 2006, the CAGR for revenue in the business has been 13%, and net income grew at a 24% CAGR even as interest rates sank. Schorr believes growth can come from its base of roughly 5,000 customer relationships and by expanding market share. He went on to say that the upside from GTS is mostly longer term. For now, he says the market for these transaction services is fragmented, and low interest rates are weighing on the business. Schorr says Citi management believes it has a 4% share of a roughly $250 billion annual market.
