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Citigroup Pays for Rally With a Downgrade

Stocks in this article: C

NEW YORK ( TheStreet) -- Sterne Agee analyst Toddd Hagerman on Monday downgraded Citigroup (C) to a "Neutral" rating from a "Buy" rating, saying "we see increasing potential downside risk vs. a meaningful upside catalyst, at least in the near/intermediate term."

"C shares have rallied 30% since the July lows, fueled by renewed optimism tied to the global economy and a meaningful global liquidity infusion" the analyst said, adding that the expected earnings and boost from a significant release of loan loss reserves from Citi Holdings -- the subsidiary into which runoff assets have been placed, as part of Citigroup CEO Vikram Pandit's continuing "good bank/bad bank" strategy of right-sizing the company's balance sheet -- and "a more meaningful reduction in the disallowed deferred tax assets " seem "a ways off."

Citi's shares are the cheapest to book value or forward earnings estimates, among the 24 components of the KBW Bank Index (I:BKX).

The shares closed at $32.97 Friday, returning 24.5% year-to-date, following a 44% decline during 2011. The shares traded for 0.6 times their reported June 30 tangible book value of $51.81, and for 7.3 times the consensus 2013 EPS estimate of $4.54, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.09.

While agreeing that Citigroup's shares are cheap to book value, Hagerman said that "potential upside from current levels is limited in our view given our fair value estimate of ~$36/share."

The company will announce its third-quarter results before the market opens on Oct. 15, with the consensus among analysts being a profit of 98 cents, compared to 95 cents the previous quarter, and $1.23 a year earlier.

Hagerman cited a litany of challenges for Citigroup. "C's international growth (~60% of revs) began to show signs of slowing in 2Q12, particularly Asia. In addition, with the recent concerted effort around the globe to actively supply seemingly endless liquidity, we are already beginning to see trade forecasts lowered, expected pressure on global currencies, concerns for rising inflation, and ongoing volume in the Euro-zone with the most troubled debtor nations."

The analyst added that "the overhang tied to persistent regulatory/political uncertainty in the U.S. and emerging geopolitical risks challenge identical catalysts to drive the shares much higher."

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