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Citigroup's Future Is Brighter Than You Think: Analysts (Update 2)

Story updated with closing prices and additional analyst commentary throughout.

NEW YORK ( TheStreet) - Citigroup (C - Get Report) closed 2011 with a big fourth quarter earnings miss, but the bank may hold major value when compared to its Wall Street peers as it enters 2012.

Taking a closer look at the numbers, while fourth-quarter earnings fell, the outlook for Citigroup's ongoing business did not dim and it remains well positioned for future growth, analysts say.
Citigroup CEO Vikram Pandit

Citigroup's fourth quarter earnings miss was largely due to a $163 million loss at its investment bank, which suffered with the rest of Wall Street in late 2011. "The main driver of the miss seemed to be in Securities and Banking, which generated weak revenues and higher than expected operating expenses," wrote UBS analysts in a research note. However, UBS maintained its "Buy" rating and $43 a share price target for Citigroup because of its low valuation and focus on risk reductions, which includes its CitiHoldings bad bank. "Citi has made solid strides in improving risk management, including winding down Citi Holdings," wrote UBS.

Citigroup CFO John Gerspach said as much, noting that the investment banking fall was a due to risk reductions and weak December capital markets activity. "In light of the macro environment, we reduced risk," said Gerspach in a media call. "[As] we turn the page on a successful 2011, it's a great time to look forward to an even better 2012 and beyond," wrote Chief Executive Vikram Pandit in a letter to employees.

Citigroup reported earnings per share of 38 cents, missing a 50 cent a share estimate, according to data compiled by Zacks . Meanwhile, fourth-quarter net income of $1.2 billion and revenue of $17.2 billion missed expectations compiled by ThompsonReuters of $18.5 billion and $1.55 billion, respectively.

While Citigroup's quarterly earnings missed estimates, the numbers still helped propel the bank to an $11.3 billion 2011 profit, its best year since 2006.

Even if Citigroup's investment bank earnings in the fourth quarter can be characterized as "terrible" they aren't key to the bank's stable growth. Instead, more than half of Citigroup's revenue and 43% of its profit comes from its lending business called Regional Consumer Banking. Meanwhile, legacy assets are falling in size and losses with each passing quarter.

"[One] quarter's trading revenues historically provide minimal forward looking insight," wrote Jeffrey Harte of Sandler O'Neill about Citigroup's revenue shortfall in a note after earnings were released. Harte rates Citigroup a "buy" with a $55 a share price target and makes it his large-cap bank pick for 2012 based on its low price to book value, non-European international growth, small U.S. mortgage exposure and dividend increase potential.

That contrasts to investment banking peers like Goldman Sachs (GS) and Morgan Stanley (MS) that are more exposed to volatile investment banking earnings and money center peers like JPMorgan (JPM - Get Report) and Bank of America (BAC - Get Report), which have greater exposure to worsening developed market earnings.

Citigroup's loan growth of 14% in 2011 also outpaced JPMorgan slightly and its exposure to souring legacy residential mortgages represents a smaller 23% of total loans, according to Sandler O'Neill estimates. That contrasts notably with Bank of America, which is expected to take billions more mortgage losses as a result of a 2008 deal to buy Countrywide Financial. As Citigroup is growing its loans, the bank is simultaneously cutting risk.
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