In a report Thursday, the team of analysts led by William Tanona, argue that Citi's shares have performed roughly in line with Bank of America's (BAC), which they say is unwarranted given "the dramatic differences in fundamentals between the two companies."
The stocks of Bank of America and Citigroup have fallen 47% and 41% respectively year-to-date, more than the decline in the SPDR Select Sector Financials ETF (XLF), which has dropped 22%.
But the analysts note that bond spreads, earnings, capital and other fundamentals tell "meaningfully different stories" when comparing the two companies.>> Citigroup Selloff is Overdone The stock market and bond market appears to have taken divergent views on the stock, the analysts noted. While shares of Citigroup have raced to the bottom with BofA, the bond market has more confidence. The cost to protect against a Citigroup default increased moderately -- with credit default swaps (CDS) trading at 189 basis points over the cost of a Citigroup bond -- while BofA CDS spreads are now at 297 basis points. Spreads on JPMorgan Chase (JPM) CDS (considered the healthiest of the big four) are trading at 115 basis points. Meanwhile, Citi also has much less uncertainty surrounding its earnings power. "Citi is not facing questions about its capital position, the company has less exposure to rep and warranty liabilities, and has a mortgage servicing business that is roughly a third the size of BofA's," the report said. "In our view, the market will eventually recognize that Citi is better positioned and faces far less dramatic uncertainty from large, mortgage-related liabilities than BofA. We believe this should lead to a premium multiple to BofA, which should lead to attractive relative returns for Citi shareholders," the analysts said. Other analysts have also argued that
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