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NEW YORK (
Citigroup(C - Get Report) shares have handily outperformed those of the other U.S. megabanks in recent weeks, and while there are a few possible explanations, one that may not receive enough attention is the possibility it could spin off its troubled North American real estate assets.
Goldman Sachs analyst Richard Ramsden floated the idea of a real estate spin off in a Sept. 10 report, devoting some five pages to the proposal. The analyst argued that spinning off the $100 billion portfolio would bring losses in Citigroup's Citi Holdings unit down to $1 billlion from $4 billion, while reducing the regulatory capital requirement by more than half.
In the same report, Ramsden argued Citigroup could write down its $40 billion of its $51 billion deferred tax asset (DTA), bringing tangible book value down to $38 from $52 but upping return on tangible common equity to 11% from 8%.
In his report, Ramsden reiterated a "buy" rating on Citigroup and argued the shares could be worth $51-compared to $32.07 at the time of Ramsden's writing. Since then, they have gained $4.25, or 13.6%--outpacing all the megabanks--while the S&P 500 has lost 4.03%
Certainly there are other possible explanations for Citigroup's surge over that time period. Many investors appear to have been cheered by the bank's third quarter earnings and by the resignation of CEO Vikram Pandit. Still, those occurred in mid-October, and Citigroup's gain over that shorter time period is less impressive.
If the notion of the real estate spin off and the DTA write down are indeed behind the rally, that could be a problem for Citi shareholders if the bank's new chief executive, Michael Corbat, decides those moves don't make sense.
Indeed, the rise in Citigroup shares since mid-September has been accompanied by a sharp drop in shares of
Wells Fargo(WFC - Get Report), which Ramsden's team removed from its "conviction list," in the same Sept. 10 report touting the potential for the real estate spin off and DTA write down by Citi. Goldman left a buy rating on Wells, but the shares are down 7.5% over the same time period that Citi has risen 13.6%.
Wells is still substantially more expensive than Citigroup by most widely accepted measures, but at some point investors will begin to wonder how much they want to pay for a checkered company with a brand new CEO when a stable, proven player like Wells keeps getting cheaper.
Written by Dan Freed in New York.