Citi Will Need to Deliver

Citigroup management has told investors the bank will reach atypically high growth rates and return on asset targets in the near term, and return capital to shareholders as soon as 2012.
By Lauren LaCapra ,

NEW YORK (

TheStreet

) -- Now that

Citigroup

(C) - Get Report

has finally rolled up the TARP, the next big question is: When will it start earning?

On Monday evening, the U.S. Treasury Department announced that it had

exited its position in Citigroup's common stock, more than two years after making its initial investment. The stock sale represented an important milestone for Citi, which had more trouble than its big-bank peers in handling its subprime mortgage exposure and took a year longer to part ways with the government's bailout program.

For the near-term it seems Citi's stock will have ample support: The shares were already climbing more than 3% at $4.60 by late Tuesday morning. Sandler O'Neill analyst Jeff Harte indicated that big-league investors who had been hesitant to dabble in Citi shares were finally diving back in.

"Increased institutional ownership is an important part of our bullish thesis on

Citi, and we believe concerns surrounding the

Treasury Department's ownership stake have been a primary deterrent to increased institutional ownership," said Harte, who rates Citi stock a buy. "The exit removes one of the primary hurdles to increased institutional ownership, which should be a significant longer-term positive."PM):

JPMorgan's Vivek Junega also said Citi is one of the "most under-owned stocks" by long-only investors, adding that current prices represent "a good entry opportunity." KBW analysts went as far as to suggest that Citi may soon become a component of the S&P 500 Index once again. Deutsche Bank analysts also urged clients to buy the stock, reiterating that Citi is a top pick.

The median price target of Wall Street analysts is $5.50, according to

Thomson-Reuters

- indicating that the stock could indeed run up quite a bit higher in the near-term.

But looking out beyond the next few months, Citi management has set its sights - and, therefore, investors' expectations - pretty high. Given the company's history of overpromising and underdelivering (to put it mildly), some are skeptical that top executives will be able to achieve their towering goals.

The rumblings about what the new Citi would look like began in earnest last March, after CEO Vikram Pandit outlined Citi's long-term goals. Once Citi's noncore businesses housed in Citi Holdings have been divested and the U.S. economy has gotten back to normal, Pandit expects the company to deliver a return on assets of 1.25% to 1.5%, with a balance sheet of roughly $1.4 trillion and a compound annual growth rate of roughly 5% for managed assets.

Looking at those numbers in isolation might not tell the average investor much. But as Susquehanna analyst David Hilder recently pointed out in a note to investors, Citi didn't achieve those rates of return or growth when it was a smaller, nimbler company in the late 1990s. The businesses it plans to focus on for growth - securities and banking - typically deliver less than 1% return on assets, Hilder added.

Asked about those concerns on Tuesday, a Citi spokesman directed

TheStreet

to management's earlier comments. In short, Pandit believes that the key to heady return on asset targets is to focus abroad - particularly in emerging markets, where the sheer growth of population and expansion of wealth deliver higher returns than mature markets like the U.S. and Europe possibly could. For instance, at a financial services conference on Nov. 17, Pandit pointed out Citi's international consumer franchise delivered the highest R.O.A. in its portfolio of businesses, of 1.7% on a trailing 12-month basis.

"This is not the future, this is the last 12 months," he added for emphasis.

Of course, there are big risks in emerging markets, too - as Citigroup, with its established international franchise, knows well.

There was Mexico's currency crisis in 1994, which led to $50 billion in assistance to stop the peso from plummeting; the Asian financial crisis in 1997, which sparked fears of a global meltdown and led to tens of billions of dollars in international aid to countries from South Korea to Indonesia; the ensuing disaster in Russia's currency and commodity markets the following year; and then Argentina, Brazil and Uruguay had major debt restructuring after their own fiscal imbalances in the early 2000s. Although these crises may seem like a grain of salt compared to the subprime disaster that's still being sorted out in the U.S. and Europe, they were

kind of a big deal

at the time.

Nonetheless, Pandit and his team are counting on Citi's leading international franchise to steer the bank toward profitability.

Cramer: Citi Has To Prove Itself >>

"We can't escape, all of us here, whatever we want to believe, the fact that we're going to have to rely on the foreign consumer in the emerging markets consuming more ... if we want to grow and that

we will be linking our wagon to global economic growth," Pandit said at a recent event. "That's a fact. That's where we are."

So far it seems management has been delivering: Citi's international consumer business continued to grow in recent quarters, delivering $3.1 billion in net income during the first three quarters of 2010 with 26% net margins and 11% growth in its loan book. Pandit notes that nearly 50% of Citi's business is in emerging markets and that the U.S. franchise it is retaining will focus on reliable, high-end customers.

And, so far, the market seems to have faith that Citi's management can turn the company back into a profitable, growing enterprise just as well as they restructured its troubled businesses and get rid of the bailout albatross.

"Don't mistake management's theme of 'leverage the global platform' as the same old song and dance," Harte said in a recent report. "While not a new strategic theme, there is a new management team working on execution, and evidence to date suggests it is delivering."

Yet there are signs that Citi might be getting a little bit ahead of itself. Pandit and CFO John Gerspach have indicated that the bank will begin returning cash to shareholders as soon as 2012. They hinted at that months before the

Federal Reserve

announced its strategy for approving dividends and buybacks and while the Treasury still had a 12% ownership stake in its common stock. Additionally, their dividend timeframe is just a few quarters ahead of

JPMorgan Chase

(JPM) - Get Report

and the same as

Bank of America

(BAC) - Get Report

, neither of which have the same operational challenges ahead.

Even though Citi is well-capitalized, it's still got to get rid of roughly $400 billion worth of assets in its Citi Holdings division and eat related losses until they're gone. So far this year, the so-called "bad bank" has been a drag on otherwise remarkable results. Citi has earned $9.3 billion, or 31 cents per share, so far this year. Citicorp was $12.4 billion in the black while Citi Holdings lost $3.2 billion.

Mike Mayo, an analyst with CLSA, is known for butting heads with Citi leadership. During a conference call on Oct. 18, he grilled Pandit and Gerspach about their ROA. targets and capital plans.

"You are giving guidance for returning some capital by the end of 2012," said Mayo. "So let's say there is almost 800 days until the end of 2012. Why go ahead and give guidance that is so far out, with all the uncertainties out there?"

Pandit acknowledged the uncertainties out there - regarding the economy, capital regulations and whatever else may come down the pike. But he stuck to his script, saying that Citi's forecasts on ROA "hasn't changed" and that "we believe we will be in a position to return capital in 2012 based on everything we know today."

-- Written by Lauren Tara LaCapra in New York

.

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Lauren Tara LaCapra

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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