Goldman Sachs moved Citigroup to its Conviction List and increased its price target on the stock, arguing the bank can control costs and benefit from solid loan growth.
Goldman analyst Richard Ramsden lifted his price target on Citigroup to $88 from $84, raising his target multiple on 2020 earnings per share.
He now uses a multiple of 10, above his prior multiple of 9.5, as management's 2020 goal of a 12.4% return on equity, or net income as a percentage of book value, is viable.
Citigroup currently trades at 9.4 times earnings, a valuation discount to peers JPMorgan and Wells Fargo, which both trade at above 12 times earnings.
"We add Citigroup to the Americas conviction list, as we see a realistic path" to a 12.4% return on tangible common equity in 2020, "putting us 70 basis points ahead of market expectations," Ramsden said.
"[And] it can achieve this without aid from either higher interest rates or strengthening global growth trends."
Analysts have been looking for large banks to continue moderating operating expenses and expand profit margins through technology and other related investments, a tailwind to return on equity.
"We see Citi and Morgan Stanley generating the most operating leverage through 2021," Ramsden said. Citigroup management is forecasting operating costs to stay flat in 2020, while revenue grows at around 2.5%.
Many analysts, including Ramsden, are looking for a modest industrywide decline in net interest income, the difference between the revenue a bank takes in on its assets and the costs of paying out interest on deposits.
But Ramsden sees Citi growing net interest income, "given [Citi's] low rate sensitivity."
Lower interest rates have spurred investor sentiment on bank stocks, as low rates increase loan volumes. "Best positioned to withstand rate pressure and generate [net interest income] growth: Citi," Ramsden said.
Analysts polled by FactSet see Citi's net interest income for 2020 falling 0.2%.
But "the market is overly pessimistic on Citigroup’s revenue-growth inflection," Ramsden thinks.
Deutsche Bank analyst Matt O’Connor downgraded Citi to hold from buy, as the stock has gained 43% in the past year, outpacing the sector.
"We see more limited upside from here," O'Connor said.
He also says Citi's consumer-lending business is too small in the U.S. and he disagrees with Ramsden on operating leverage. Citi has "less future expense flexibility," O'Connor said.