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Stick With Citigroup Stock, Says B of A Merrill

NEW YORK (TheStreet) -- The expected cutting of earnings estimates for the nation's largest banks continues, but Bank of America Merrill Lynch analyst Erica Najarian still thinks Citigroup's (C - Get Report) stock is a bargain.

In light of JPMorgan Chase's (JPM) announcement at its investor conference last month that first-quarter trading activity was running at a 15% slower pace than last year, followed by similar guidance from Citigroup, analysts have expected a soft first quarter for the nation's largest banks. Jefferies analyst Ken Usdin cut his first-quarter earnings estimate for Citi significantly, and predicted other analysts would follow suit, while writing in a client note that he favors JPMorgan and Bank of America (BAC) for the next year, over Citigroup.

Najarian on Wednesday cut her 2014 earnings estimate for Citigroup to $4.95 a share from $5.60, while also cutting here 2015 EPS estimate to $5.80 from $5.90, and cutting here 2016 EPS estimate to $$6.20 from $6.35.

Citigroup's shares closed at $48.14 Tuesday, down 8% this year, following a return of 32% in 2013. The shares trade for 0.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 8.4 times the consensus 2015 EPS estimate of $5.72. By both of those measures, Citigroup is the cheapest among large-cap U.S. bank stocks.

Citi will announce its first-quarter earnings on April 14, with a consensus EPS estimate of $1.23. Najarian's first-quarter EPS estimate is $1.05.

In addition to the trading revenue weakness, Najarian cited continued additions to loan loss reserves in the Citi Holdings runoff subsidiary, as well as Citigroup's "elevated litigation costs."

This year's weakness for the stock reflects investors' concerns over Citigroup's exposure to emerging markets, since most of the bank's revenue and profit is derived from outside the United States.

"More recently, investors are concerned that the fraud issue in Banamex could impact C's stress test process this year," Najarian wrote. The Federal Reserve will announce the results of its annual stress tests for major U.S. bank holding companies on Thursday. The regulator on March 26 will follow up with the results of the annual Comprehensive Capital Analysis and Review, which incorporates banks' plans to deploy excess capital into another set of stress tests. Most analysts expect a significant increase in Citi's quarterly dividend from the current penny a share, as well as a major increase in planned share buybacks.

"But the more dominant feedback from investors is fears C is a 'stalled' restructuring story. Weak quarters have been leading to estimate cuts, undermining the market's faith in C's ability to meet their mid-term goals," which include a return on tangible equity of 10% and a return on assets ranging from 0.90% to 1.10% by 2015, Najarian added.

Citigroup's 2013 return on tangible common equity was 8.20%, improving from 4.80% in 2012, according to Thomson Reuters Bank Insight. The bank's return on average assets was 0.73% during 2013, improving from 0.39% the previous year.

But Najarian thinks Citi's stock could be an excellent play for investors. For starters, she expects Citi's tangible book value to rise to $60 at the end of 2014. She also sees no "risk" to the bank's tangible capital, because its regulatory capital ratios are above peers, and it has "plenty of EPS power to absorb even credit hiccups internationally."

"Therefore, once the market have been convinced estimates have bottomed and C lays out a more convincing path towards achieving its mid-term goals, a re-rate to TBV can happen quite quickly - and we've seen this happen at other large financials," the analyst concluded.

Najarian rates Citigroup a "buy," with a $65 price target, implying 35% upside from Tuesday's close.

Citigroup's shares were up 0.6% in morning trading Wednesday, to $48.42.

This chart shows the performance of Citi's stock against JPMorgan, Bank of America and the KBW Bank Index (I:BKX) since the end of 2011.

C Chart data by YCharts

A Harsh Downgrade for HSBC

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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