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TheStreet Open House

Citigroup EPS Estimates Cut Significantly

Stocks in this article: CBACJPM

NEW YORK (TheStreet) -- Citigroup (C) has had its share of bad news lately, and analysts are making major cuts to their 2014 earnings forecasts for the bank, following a presentation by the company's CFO John Gerspach on Monday.

Gerspach at the Raymond James Institutional Investors conference on Monday said, "in total we currently see our markets revenues being down by a high mid-teens percentage year over year." The CFO also said first-quarter investment banking revenue was "tracking lower" and that expenses would be "modestly higher than the fourth quarter."

Atlantic Equities analyst Richard Staite on Wednesday cut his 2014 earnings estimate for Citigroup by 19% to $1.14 from $1.40, and cut his 2014 EPS estimate to $4.59 from $4.96. In a note to clients, Staite also expressed doubt in Citigroup's ability to hit its 2015 target of a 15% return on tangible common equity (ROTCE).

Staite stuck with his "neutral" rating for Citigroup, with a price target of $55, representing 13% upside potential from Citi's closing price on Tuesday of $48.83. He also left his 2015 EPS estimate unchanged, at $5.38.

Credit Suisse analyst Moshe Orenbuch on Tuesday cut his first-quarter EPS estimate for Citi by 15% to $1.21 from $1.41, and cut his 2014 EPS estimate to $5.00 from $5.25, while leaving his 2015 EPS estimate unchanged at $5.85.

Orenbuch rates Citi "outperform," with a $65 price target.

JPMorgan Chase (JPM) last week during its Investor Day presentations was the first major U.S. bank to signal a slow first-quarter for trading, saying said it expected its trading revenue to decline by 15%. But analyst reaction was on the whole positive, because the bank seems well-positioned to reach its "normalized" goal of a 15-16% ROTCE.

JPMorgan's 2013 ROTCE was 11.92%, according to Thomson Reuters Bank Insight, declining from 14.72% in 2012. The 2013 result wasn't bad, considering that the company booked a third-quarter loss as it set aside $7.2 billion for litigation reserves, after tax, in preparation for $17.5 billion in residential mortgage-backed securities settlements with government authorities and private investors in the fourth quarter. In comparison, Citi's 2013 ROTCE was 8.20%, improving from 4.80% the previous year.

KBW analyst Christopher Mutascio on Sunday lowered his first-quarter EPS estimate for JPM to $1.38 from $1.43, while lowering his 2014 EPS estimate to $5.90 from $5.95. Mutascio rates JPMorgan "outperform," with a price target of $63, representing upside potential of 10% from the stock's closing price on Tuesday of $57.26.

In light of the announcements by JPMorgan and Citi, analysts are expecting Bank of America (BAC) to be affected as well.

Orenbuch of Credit Suisse on Tuesday lowered his first-quarter EPS estimate for Bank of America by a nickel to 24 cents, while cutting his 2014 EPS estimate to $1.30 from $1.35. Orenbuch has a "neutral" rating on BAC, with a price target of $16.00. Bank of America's shares closed Tuesday at $16.73.

Mutascio of KBW on Tuesday also cut his first-quarter EPS estimate for Bank of America, but by only two cents to 26 cents. His 2014 EPS estimate was also cut by two cents to $1.36. Mutascio rates Bank of America "market perform," with a price target of $18.50.

Bank of America's stock trades at a significantly higher price-to-forward-earnings valuation than Citigroup or JPM. The stock trades for 1.3 times tangible book value and for 10.3 times the consensus 2015 EPS estimate of $1.62, among analysts polled by Thomson Reuters.

Citigroup trades for 0.9 times tangible book value, and 8.5 times the consensus 2015 EPS estimate of $5.73, making it the cheapest large-cap U.S bank stock and of the cheapest among all U.S. bank stocks for which earnings estimates are available.

JPMorgan trades for 1.5 times tangible book value, but for 9.0 times the consensus 2015 EPS estimate of $6.35.

Following two years of nightmare headlines for JPMorgan, including the fallout from the "London Whale" trading losses in 2012 and too many regulatory settlements to count during 2013, it will be interesting to see how the headlines play out for Citigroup this year. Several investigations have been initiated following Citi's announcement last week of a major fraud involving its Banamex subsidiary in Mexico, including investigations by the Securities and Exchange Commission and the Federal Bureau of Investigations.

It's too early to know if the Banamex situation and other concerns over Citigroup's international exposure may outweigh the expected announcement of plans for a major return of capital to investors on March 26, after the Federal Reserve completes its annual capital plan reviews for major U.S. banks.

For more on what to expect from the Federal Reserve's annual round of stress tests, please see Why You Should Celebrate Bank Stress Tests and Citigroup, Stress Tests and Shareholder Gravy.

This table shows the stock performance for Citigroup, JPMorgan and Bank of America against the KBW Bank Index (I:BKX) and the S&P 500 since the end of 2011:

C Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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