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Citigroup May Be the Bank of America of 2013

Stocks in this article: C BAC WFC USB RF

NEW YORK ( TheStreet) -- With hours left in 2012, Bank of America (BAC) is poised to double for the year, amid investor optimism the mega bank will succeed in resolving litigation stemming from the housing bust and eventually return capital to shareholders.

Heading into the New Year, however, some analysts expect 2013 will be the year when Citigroup's (C) stock outperforms competitors.

The difference heading into 2013 is that while investors now value Bank of America at a just a small discount to its total assets, they don't give Citigroup the credit it deserves for resolving crisis time issues and its improving earnings outlook, which could drive share repurchases or dividends in the New Year.

According to Marty Mosby, a banking sector analyst with Guggenheim Partners, the compelling value of Citigroup relative to Bank of America follows a multi-year recovery process for both bailed out lenders. While Bank of America saw its stock jump over 100% as its balance sheet was shored up in 2012, Citigroup may credit for expense cuts that will drive meaningful earnings growth in 2013.

Mosby says that the recovery of banking sector giants follows a three-step process of working through credit writeoffs, cutting expense, and rebuilding liquidity and capital. In 2012, a set of multi-billion writeoffs and pending costly settlements with U.S. regulators tied to the housing bust helped Bank of America put most of step one behind it, which according to Mosby, drove the company's rising stock and improving valuation relative to tangible book value.

Citigroup, Mosby argues, trades as if it were still in the early stages of recovery when, in reality, the bank is likely to prove an impressive earnings picture in 2013 that could drive return of capital to shareholders.

At this time last year, investors were pining for Citigroup to pass Federal Reserve stress tests and pay a dividend; however, recently ousted chief executive Vikram Pandit was unable to deliver those capital returns and Citigroup was the largest bank to fail stress tests. Newly appointed CEO Michael Corbat may have better luck after announcing a giant layoff and cost cut initiative in November, according to Mosby.

In contrast, Mosby is skeptical Bank of America, which he says remains saddled by lawsuits that will keep earnings eroding expenses running high in 2013.

Consensus analyst estimates appear to back Mosby's thesis on Citigroup's outperformance relative to Bank of America in 2013.

According to analyst estimates polled by ThomsonReuters, Citigroup is expected to see its net income grow to nearly $14 billion, driving earnings per share to $4.65 a share as revenue stays below $80 billion. In contrast, Bank of America is expected to report a smaller $10.7 billion in net income on $90.8 billion in revenue, which translates to just 96 cents in EPS, according to the ThomsonReuters data.

While investors see strong EPS for Citigroup in 2013, that outlook may not be fully reflected in the bank's valuation. As of Friday's close, Citigroup's shares trade at $39.01, 0.7 times their reported Sept. 30 tangible book value of $52.70. In contrast, Bank of America's shares closed at $11.36 on Friday, trading for 0.8 times their reported Sept. 30 tangible book value of $13.48.

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