This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Buy Big Bank Stocks and Give Regionals a 'Breather': Merrill Lynch (Update 2)

Stocks in this article: C JPM FITB USB


Citi's shares closed at $34.60 Tuesday, returning 32% year-to-date, following a 44% decline during 2011.

The shares trade for 0.7 times their reported June 30 tangible book value of $51.81, and for 7.6 times the consensus 2013 earnings estimate of $4.55. The consensus 2012 EPS estimate is $4.07.

For the 12-month period ended June 30, Citigroup's operating return on average assets (ROA) was 0.55%, while the company's return on average tangible common equity (ROE) was 7.22%, according to Thomson Reuters Bank Insight.

Citigroup will announce its third-quarter results next Monday. The consensus among analysts is for the company to report a profit of 96 cents, declining from a dollar a share in the second quarter (excluding credit and debit valuation adjustments), and $1.23 during the third quarter of 2011.

Penala's price target for Citigroup is $45, offering "the most potential upside" among the large-cap bank stocks she covers. The company is "one of the more misunderstood banks," she said, "in that investors view outsized risk in its international operations and overlook its EPS leverage to a US housing recovery."

Citigroup CEO Vikram Pandit's long-term "good bank/bad bank" strategy for Citigroup is to pursue growth in the company's international operations, while placing noncore assets -- including the company's 49% stake in the Morgan Stanley Smith Barney joint venture, which the company is selling to Morgan Stanley (MS) -- within the Citi Holdings subsidiary, and allowing them to run off.

Penala said that within Citi Holdings "is a $100bn residential first mortgage and home equity portfolio (15% of total loans), $6.9bn of nonperforming loans (NPLs), and 9.3% reserve/loans ratio," illustrating that the runoff subsidiary has much to gain from a housing recovery, and also has plenty of excess reserves, which can eventually be recaptured in earnings.

"Over time, we expect C to return 25% of market cap to shareholders," through dividends and share buybacks, the analyst said.

Penala also said that "a housing recovery could mean improving inflows of new defaults and better than expected realized values on the residential portfolio, accelerating credit leverage to EPS," and that "if housing continues to recover, we believe portfolio managers looking to increase weight in banks will invest in C incrementally given fair values at regionals and underweight positioning in C."

C Chart C data by YCharts

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

2 of 5

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs