If chronic under-investment by institutions were a sickness, Citigroup Inc. would be an acute sufferer — albeit one showing signs of improvement.
Hedge funds run by John Paulson, George Soros and Eric Mindich started pouring money into the stock late last year, and institutional ownership in Citi could get another boost as the government begins unloading its 27% stake in the company.
With the Treasury Department planning what essentially could amount to a series of frequent block sales between now and the end of the year, investment companies, pension funds and mutual funds could find an easy way into the stock that would allow Citi, notable among big banking companies for its retail-heavy investor base, to narrow the gap with sector peers.
Institutions hold 77% of the common stock at JPMorgan Chase & Co. and Wells Fargo & Co., and 58% at Bank of America Corp. At just below 40%, the percentage of institutional ownership in Citi — a financial services behemoth with a market value of $119 billion — is akin to that of Valley National Bancorp, a $2.4 billion market-capitalization company in Wayne, N.J.
Making inroads with institutional buyers would likely serve as a catalyst for Citi shares. Increased demand presumably would apply upward pressure on the price, while putting the market on notice that yet another wave of 'smart money' was migrating toward the stock.
"An important part of our bullish thesis on Citi remains the potential buying power of underweight institutional investors," Jeff Harte, an analyst with Sandler O'Neill & Partners LP, wrote in a report last week as news of the Treasury Department's intention to rid itself of its 7.7 billion Citi shares began to leak out.
But Deon Strickland, a Wake Forest University finance professor who has studied different aspects of stock ownership composition, said any impact from an increase in Citi's institutional investor base would probably be short-term.
"In terms of the true value of the firm," he said, "I don't think there's a great deal of evidence out there that suggests Citi will be worth more or less if institutional ownership rises over the coming year. It's going to be a nice, natural experiment, though."
Institutional ownership in Citigroup was as high as 63% in the years leading up to the financial crisis, according to data from SNL Financial. But many big investors abandoned the stock after the turmoil of 2008 and the drastic reshaping of the company's capital structure that occurred in 2009, when the Treasury Department and private investors agreed to convert preferred stockholdings into common equity. The number of common shares outstanding ballooned from about 5 billion at the end of 2007 to more than 28 billion at the end of 2009.
In the second half of last year, Paulson helped refocus positive attention on the stock, as his Paulson & Co. investment firm accumulated more than 500 million Citi shares. Fourth-quarter filings by other hedge funds showed a growing appetite for the stock: 215 million shares held by Bruce Berkowitz's Fairholme Capital Management LLP; 138 million shares for Mindich's Eton Park Capital Management LP; nearly 95 million shares accumulated by Soros Fund Management LLC.
Other institutional buyers may be in the wings, but they may be waiting for more clarity on the Treasury's plans for releasing its stake, not to mention more evidence that the poster child for the U.S. bank bailout program has found more stable footing.
"It's an attractive name in some ways, but it's also a lot riskier" than its more richly valued peers, said Jaime Peters, an analyst at Morningstar Inc. And Citi's $4.18 per-share price tag (down 13 cents Monday) is not much of a discount to long-term fair value as modeled by Morningstar. "They're going to be a much smaller company" than before, Peters said, potentially with less profitability and a greater regulatory burden.
More institutional ownership wouldn't change her opinion on the stock. Investor base composition can make a difference, Peters said, citing the example of an institutional buyer with activist intentions or a strengthening retail base that demands greater dividends, but she doesn't expect either scenario at Citi anytime soon.