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Citigroup: Financial Fiscal Cliff Bounce Winner (Update 1)

Stocks in this article: BAC C WFC I:BKX

Atlantic Equities analyst Richard State made the case last Wednesday that Bank of America is solidly capitalized and will be approved to return significant capital to investors after the next round of Federal Reserve stress tests in March, saying the company had "already met its Basel III capital requirements in Q3," years in advance of regulatory requirements.

JPMorgan Chase analyst Vivek Juneja on Friday reiterated his "Overweight" rating for Bank of America, while raising his price target for the shares to $13 from $11.50, citing the "significant benefit from potential housing market recovery, potential for significant increase in normalized earnings, ongoing improvement of capital levels, relatively attractive valuation, and position as a leading retail and commercial banking franchise in the US."

Discounted to Book and Ready to Pay

Bank of America's shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48, while Citigroup's shares trade even lower, at 0.7 times their reported Sept. 30 tangible book value of $52.70. These discounts underline the potential for both stocks to outperform during 2013, despite their strong recoveries this year.

For Citigroup, investors will be looking for the company to follow through with former CEO Vikram Pandit's "good bank/bad bank" strategy of parking noncore assets within Citi Holdings, selling them off or winding them down, while freeing up excess capital.

Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that following the stress tests, Citigroup will raise its quarterly dividend from the current nominal penny, to 15 cents.

Wells Fargo

Wells Fargo trades at higher valuations than Citi and BAC, reflecting the company's growing share of the mortgage lending market, as well as its strong earnings performance, with quarterly operating returns on average assets increasing to 1.46% from 1.27% over the past five quarters, according to Thomson Reuters Bank Insight.

The shares trade for 1.7 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.5 times the consensus 2013 EPS estimate of $3.63, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.94.

Based on a quarterly dividend of 22 cents, Wells Fargo's common shares had a dividend yield of 2.56%.

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