5 Cheap Bank Stocks With a Strong Earnings Future

2. Citigroup

Shares of Citigroup (C) closed at $37.17 Monday, returning 41% year-to-date, following a 44% drop during 2011. The 12-month return for the shares is a negative 16%.

The shares trade for just under eight times the consensus 2013 EPS estimate of $4.78, and for 0.8 times tangible book value.

Citigroup's plan to increase its return of capital to investors this year, through an increased dividend and share buybacks, was rejected by the Federal Reserve.

The Federal Reserve's 2012 stress tests were based on a harsh economic scenario, with real U.S. GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013." In addition, under the Fed's adverse scenario, "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012."

In order to pass the stress tests, the results had to show that the group of 19's estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.

In order to have their capital plans approved, the companies' estimated Tier 1 capital ratios at the end of 2013 would have to be above 5%, "with all proposed capital actions through Q4 2013."

According to the Fed's revised stress test results, Citi would see $19.6 billion in loan losses through the end of 2013, with a Tier 1 common equity ratio of 5.9%, falling to 4.9% at the end of 2013 if the company were to follow through with its submitted, and rejected, capital plan.

Investors might still see an increased return of capital from Citi this year, as the company announced last Tuesday that it would "submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations."

Morgan Stanley analyst Betsy Graseck has a neutral rating on Citigroup and on Sunday raised her 2012 EPS estimate to $3.67 from $3.34, and her 2013 EPS estimate to $4.40 from $4.15, while raising her price target for the shares to $42 from $30.

Graseck said she expected "Citi to resubmit their capital plan in 1h12 and begin returning capital in 2h12," in "more meaningful amounts" than the current one-cent quarterly dividend, and through an estimated $1.5 billion in share buybacks during 2012.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

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