Count veteran banking analyst Mike Mayo among those on Wall Street caught off guard by Berkshire Hathaway’s recent $2.95 billion bet on Citigroup stock. The move, disclosed in Monday’s regulatory filings, is Berkshire’s largest new bet on financials made in the first quarter. Berkshire also took a much smaller stake in online bank Ally Financial. Citigroup shares rose 6.8%. “It seems like Warren Buffett owned every major bank except Citigroup,” said Mayo, who has covered Citigroup and its predecessors for three decades. “It’s a bit surprising given the scale of Citi’s troubles and the rocky road ahead.” Here’s the context: Berkshire added to American bank stocks in 2018, including category leaders JPMorgan Chase and Goldman Sachs. The company then divested in Citigroup divested of many of its bank holdings in 2020 due to concerns sparked by the global pandemic and stuck to a trimmed portfolio of US-centric retail banks led by Bank of America and US Bancorp , Citigroup was in the midst of a restructuring under led by then-CEO Mike Corbat. Corbat was unable to get a handle on the bank’s woes and was replaced by his deputy, Jane Fraser, in March 2021. Fraser held its first Investor Day in March this year and vowed to improve the bank’s returns, which have lagged behind its peers for years. Citigroup stock, which already has the lowest valuation of any major bank, has been hit further this year, hitting a 52-week low of $45.40 last week. Among its peers, it’s the only top six institution that trades for less than its tangible book value, a key bank metric that indicates investors view management as destroying shareholder value. But all of these facts mean that as long as Fraser succeeds in its turnaround plan, Citigroup could have the greatest long-term value for new investors. While Berkshire is getting Citigroup for a “ridiculously low price,” Mayo said it wouldn’t interfere if they didn’t also have faith in Fraser and their plan. “It’s not enough to just be cheap, you have to have a good franchise and do good things with it,” Mayo said. “Citi is dealing with their problems, it’s changing and they should be going to a better place. This is validation of that plan.” Berkshire, which has easily outperformed the market over the decades due to Buffett’s eye for value, is being watched closely for clues as to how the famous investor views the market. Berkshire spent a net $41 billion buying new stock in the first quarter, buying energy stocks like Occidental and Chevron. But the relatively modest purchase of Citigroup stock given the size of Berkshire’s more than $340 billion portfolio suggests it was made by one of Berkshire’s portfolio managers, Ted Weschler and Todd Combs, according to Edward Jones analyst James Shanahan could be. “Given the size of the investment, it’s possible, maybe even likely, that this investment was made by one of his two lieutenants,” Shanahan said. He called Berkshire’s stake in Citigroup a “deep value play” on the shares of a troubled lender. “The gap between Citi and its big banking peers just widened,” Shanahan said. “Apart from the valuation, there is nothing here that is particularly exciting in the short term.”
https://www.cnbc.com/2022/05/17/what-may-be-behind-buffetts-surprising-deep-value-bet-on-citigroup.html What Could Be Behind Buffett’s Surprisingly Deep Value Bet on Citigroup?