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Citi on Path to Higher Capital Return: Analysts

Stocks in this article: C JPM BAC WFC XLF

NEW YORK ( TheStreet) -- Citigroup's (C) superior performance in the Federal Reserve's annual stress tests suggests that the bank has made progress in de-risking its balance sheet and is well-placed to return more capital to shareholders, analysts said in early reactions to the results.

Citi's results were a "clear standout", Bank of America analyst Erika Penala said in a note, noting that Citi's stressed capital ratio of 8.9% (8.3% minimum) exceeded her estimate of 6.6%, implying "significant long-term capital return capacity."

The Federal Reserve's estimated $55 billion in losses for Citigroup through 2014 in a severe recession "were 18% lower than last year and 34% lower than our estimate - suggesting a de-risked balance sheet. This is important for a stock trading below TBV tangible book value , as market multiples improve as investor feel more comfortable about balance sheet risk," Penala wrote.

The analyst reiterated her buy rating and raised her target price on the stock to $50 from $46.

Shares of Citigroup were up 2% in early trading, to $45.79.

The Federal Reserve said after the close on Thursday that 17 of the 18 largest banks passed the regulator's annual test that gauges the ability of banks to withstand a deep recession.

Citigroup's performance bettered its "big four" peers -- including JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) -- in a "severely adverse scenario" that included a 12% unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

Citigroup's projected Tier I Common ratio was projected to fall to a minimum of 8.3% from 12.7%, leaving it a significant cushion over the regulatory minimum of 5%. Meanwhile, Wells Fargo and JPMorgan, which are known for their fortress balance sheets, saw projected minimum Tier 1 common ratios of 7% and 6.3%, respectively, under the scenario .

Atlantic Equities analyst Richard Staite noted Citi's improvement in performance over the previous year. "Not only did Citi go into the test with a higher Tier 1 common ratio at 12.7% vs 11.7% but the stress impact was less at 4.4% vs 5.8% last year," he wrote. "Thus its minimum ratio through the test was 8.3% vs 5.9% leaving it with a $32bn capital cushion vs only $9bn last year."

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