Why is Citigroup cheaper then other banks like Bank of America?

As markets race to new highs and investors get antsier looking for opportunities. I’ve found myself more and more inactive. It seems more and more that things that are cheap have good reasons to be cheap. While there’s pockets of bubbling in some tech and other arenas, in general most things are trading more “fairly” and incorporating future prospects into today’s price.

Lately you hear the cry about why Citigroup (C) is cheaper then Bank of America (BAC).

Why is Citigroup trading at a discount to Bank of America?

Part of it has to do with the story of how Citigroup came to be. It’s as Wikipedia describes a firm that over time amalgamated into Citicorp a multinational banking corporation operating in more than 100 countries.

There are a number of reasons that Citigroup trades at this discount and part of it is the fact the bank has experienced more near death experiences. Beyond the 2008 financial crisis, Citigroup funded Enron, sold stocks and bonds for WorldCom,  had to spinoff Travelers insurance due to losses from the September 11th, 2011 attacks. And that’s the tip of the iceberg and doesn’t consider the current issues in Mexico or the past Salomen Barney issues.

Bank of America has had its fair share of problems but most of them originated with the purchase of Countrywide Financial in the 2008 Financial Crisis. Bank of America has become an even more conservative entity since 2008 and is further along in its transformation from 2008 then Citigroup is.

The bottom line is summed up in one graphic

While we maintain that most financial institutions including Citigroup remain cheap on a historical basis and have more capital and can withstand a storm more so then any other time.

The bottom line is that Citigroup has had more near death experiences, is a collection of more questionable assets thrown together more haphazardly and has a much higher cost of deposits. For a bank having a low cost funding base or large deposit base like Wells Fargo or Bank of America is a key asset.

This is why Citigroup deserves to trade at a discount to banks and even Bank of America (BAC).

Disclosure: Author is Long Bank of America

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