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As Citi Gets Boring, Shareholders Get Excited

Citi has built a significant amount of capital and now boasts a Basel III Tier I Common Capital of 9.3%, putting it ahead of JPMorgan Chase's (JPM) capital ratio of 8.9%. Management expects to finish the year with the capital ratio at 10% or more, giving it a buffer over the proposed regulatory minimum of 9.5% for too-big-to-fail banks.

These are all important elements to Citi's earnings recovery story, so it is natural that investors and analysts are welcoming the results.

But the key is for the bank to keep delivering on its promise.

"Citigroup's stock is still a show me stock, in our view," RBC Capital analyst Gerard Cassidy wrote [emphasis his]. "As the result of the company's track record over the last five years, investors are demanding to see the results rather than give management the benefit of doubt that the results will materialize before they purchase the stock. Therefore, Citi shares will likely remain volatile for as long as Citi Holdings remains a sizable influence. We believe any sale or acceleration of disposals from Citi Holdings will leave little doubt in investors' minds that its recovery is sustainable. The more boring the company becomes the better the stock valuation, in our view."

Oppenheimer's Kotowksi echoes that view, noting that while Citi's topline growth in most segments was nothing to write home about, it exhibited tremendous stability in the first quarter. "Given that Citi's greatest weakness in recent years has been adverse surprises, we'll take stability[over growth]. With the stock at 86% of tangible book value, we think that stability is all you need to get to TBV. Over time, stability leads to more capital for either buybacks or business investment that can drive it higher from there."

Joshua Siegel, CEO of Stonecastle Partners, which is actively invested in community banks, says Citigroup has a long road ahead of it, but has the right management in place to implement its turnaround.

"Citigroup is Titanic times 1000. It is very hard to turn that ship. The captain has turned the wheel but the ship won't turn on a dime," he said in an interview with TheStreet last week.

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