NEW YORK (
(C - Get Report) is the only remaining major U.S. bank trading for less than tangible book value, but Atlantic Equities analyst Richard Staite -- who long touted the stock -- on Friday lowered his rating on the shares to "neutral" from "overweight."
Staite lowered his price target for Citigroup to $55 from $59 and lowered his 2014 earnings-per-share estimate by 8% to $4.96 and his 2015 EPS estimate by 6% to $5.58.
In a note to clients, Staite wrote that revenue in Citi's Securities & Banking segment had "already disappointed in Q3 and Q4" because of the rise in long-term rates in anticipation of the Federal Reserve's tapering of long-term bond purchases, which was finally announced in December. The central bank last month said beginning in January it would reduce its monthly bond purchases to $75 billion from $85 billion, and most economists expect a similar reduction to be announced following the next meeting of the Federal Open Market Committee on Jan. 28 to 29.
Despite all the taper talk, the Fed's main policy tool remains the short-term federal funds rate, which has been locked in a range of zero to 0.25% since late 2008. The FOMC has repeatedly said this "highly accommodative" policy is likely to remain appropriate at least until the U.S. unemployment rate drops below 6.5%. We're getting pretty close, as the unemployment rate declined to 6.7% in December from 7.0% in November, however, a major factor in that decline was a decline in the labor participation rate. Several Fed governors have said the federal funds rate probably won't be raised for some time after the unemployment rate dips below 6.5%.
But there's only one way short-term rates can go, and that is up. With that in mind, Staite expects Citi's lending business in emerging markets "to slow particularly when U.S. short-term rates rise."
"Some will argue that the EM slowdown has happened and the outlook for 2014 is better but we are less sanguine. Citi's own management acknowledge that previous policy transitions have never happened smoothly," Staite wrote.
Like most major U.S. banks, Citigroup has seen a significant boost to earnings over recent years from the release of loan loss reserves. According to Staite, Citigroup will have to start building up reserves for its Asia loan portfolio, having already begun this process for its loan portfolio in Latin America.
"In North America reserve releases of the past two years appear to be at an end and instead the bank needs to add to reserves for the recently acquired Best Buy card portfolio. This will create a headwind to reported earnings growth," he added. Citi purchased roughly $6 billion in Best Buy (BBY) credit card loans from Capital One (COF) in September.
Staite is not the only sell-side souring on Citi, as the consensus 2014 EPS estimate for the bank has declined by 3.6% since it announced earnings, while consensus EPS estimates for seven other major large-cap U.S. banks have been flat or have risen since fourth-quarter earnings were reported, according to Staite's fourth-quarter earnings review, using data supplied by SNL Financial.
Staite also sees Citigroup as having completed most of its cost-cutting. "In our view, cutting costs will only be possible by exiting the consumer operations in more countries and this is something Citi may be unwilling to implement," he wrote.
The analyst on Friday reiterated his "buy" ratings for Bank of America (BAC - Get Report) and JPMorgan Chase (JPM), which he thinks "are better placed to benefit from a recovering U.S. economy."
Here are the valuations and consensus EPS estimates for all three stocks as of Thursday's close:
- Shares of Citigroup closed at $50.72 Thursday. The shares trade for 0.9 times their reported Dec. 31 tangible book value of $55.38 and for 8.7 times the consensus 2015 EPS estimate of $5.84, among analysts polled by Thomson Reuters. On a forward P/E basis, Citi is one of the cheapest of all publicly traded U.S. banks. The consensus 2014 EPS estimate is $5.03.
- Bank of America closed at $16.86 Thursday. The shares trade for 1.2 times their reported Dec. 31 tangible book value of $13.79, and for 10.4 times the consensus 2015 EPS estimate of $1.62. The consensus 2014 EPS estimate is $1.33.
- JPMorgan Chase closed at $56.47 Thursday. The shares trade for 1.4 times their reported Dec. 31 tangible book value of $40.81 and for 8.9 times the consensus 2015 EPS estimate of $6.34, making the stock only slightly more expensive than Citi on a forward P/E basis. The consensus 2014 EPS estimate for JPM is $5.99.
The following chart shows the performance of all three stocks against the KBW Bank Index (I:BKX) and the S&P 500
data by YCharts
-- Written by Philip van Doorn in Jupiter, Fla. Follow @PhilipvanDoorn