Take a look inside ValueAct's investment thesis on one of the largest U.S. banks

Published Thu, Oct 8 20202:22 PM EDTUpdated Thu, Oct 8 20202:28 PM EDT

(This story is for CNBC Pro subscribers only.) Activist investing firm ValueAct is making a big bet on what it calls "the world's best corporate bank." With newly minted CEO Mason Morfit at the helm, replacing founder Jeff Ubben, the hedge fund see's Citigroup's stock reaching $80 per share in the near-term and $150 per share in the long term. ValueAct has been building a stake in Citi since 2018. With Citigroup shares down about 43% in 2020, Morfit told the 13D Monitor's Active-Passive Investor Summit on Thursday that financials are "safe and cheap" this year. The new chief executive said being cheap isn't an investment thesis but it is a good entry point into a company, when an investor has such high conviction about its long-term growth prospects. For ValueAct, that is Citigroup. "People still think about banks as lumps of capital that are prone to blow up every 10 years," said Morfit. "2020 is the sum of all fears. We are in the stress test and they are surviving and thriving." Citigroup, specifically, is perceived as poorly positioned compared to its peers, volatile with earnings, low growing and as risky, said Morfit. In reality, ValueAct see's Citi as the "best corporate and institutional banking platform" with a strong foundation and steady and underappreciated secular growth. The company's institutional bank accounts for three quarter's of Citi's net income and has grown annually about 21% since 2015. The business is a "core driver of earnings power" with an "integrated platform enabled by Citigroup's irreplaceable footprint and network." "Citigroup's 'Treasury and Trade Solutions' is the backbone of the franchise, a sticky, mission-critical product yielding unmatched insights into Institutional Citigroup clients," said Morfit. The investor added that the platform has all the characteristics of a best-in-class enterprise software company. The institutional banking unit delivers $6 of earnings, growing 20% per year. On its own, the business is worth $70 to $110 per share, said Morfit. Citi traded around $44 per share on Thursday. "The institutional franchise is exactly the kind of high quality differentiated platform we look to invest behind," said Morfit. "Over the next decade, we believe the platform can continue to compound its earnings per share at high teens levels." The other 25% of Citi's earnings comes from its global consumer bank, which Morfit said are an attractive set of franchises in North America, Latin America and Asia. Morfit mentioned ValueAct's excitement for Jane Fraser to take the reins of Citigroup, becoming the first female head of a major Wall Street bank. CNBC reported last month that the activist investor played a key role in accelerating the departure of former-CEO Michael Corbat. ValueAct was "very disappointed" in Citigroup's performance under Corbat and his deputies, according to people with knowledge of the situation. Specifically, ValueAct was unhappy that the bank missed key performance targets for returns and expenses that it had set for itself in 2017, and that eroded the lender's credibility, the people said. Citigroup reporting quarterly results on Tuesday.

A pedestrian wearing a protective mask walks past a Citibank branch in New York on Friday, April 10, 2020.

Bloomberg

(This story is for CNBC Pro subscribers only.)

Activist investing firm ValueAct is making a big bet on what it calls "the world's best corporate bank."