NEW YORK (
shares gained ground Monday as Wall Street's comfort with bank's capital position and its ability to stay profitable in the coming quarters grew in the wake of Friday's earnings report.
After dipping for much of the morning, the stock was up 2.8%, or 11 cents, to $4.01 in late afternoon trades. Volume of 480 million compared to the issue's trailing three-month daily average of 807.8 million.
One positive for the stock was Moody's Investors Service on Monday raised its outlook on Citigroup's stand-alone bank financial strength rating to stable from negative, citing the bank's strengthened capital position and improved risk profile. Moody's still rates Citigroup's bank financial strength at C minus, the equivalent to a Baa2 on its long-term debt rating scale, it says.
The agency also lifted its view on Citigroup's hybrid securities to stable from negative. These securities include: junior subordinated debt rated Ba1, cumulative preferred securities rated Ba2 and non-cumulative preferred securities rate Caa1, the ratings service said. Moody's already has a stable outlook on Citigroup's senior debt (both long term and short term) as well as deposits ratings.
Citigroup's improved capital profile "provides a greater buffer against the losses that Moody's anticipates in an expected case and, critically, in a more severely stressed scenario" for Citigroup's residential mortgage portfolio, credit cards and structured residential mortgage securities.
In addition, Citigroup's reduction in troubled assets, primarily the sale of structured residential mortgage securities were at better-than-expected prices, while first half 2010 earnings were higher than the ratings agency was expecting.
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Still Moody's cautions that if Citigroup were to take a "sizable" reserve against its deferred tax asset -- an outcome that is low -- could result in a downgrade in the bank's financial strength, it says.
Rochdale Securities analyst Richard Bove said Monday he was "very encouraged" by the company's direction, although he did quibble a bit with the amount of cash that Citigroup has these days, saying it is earning "well below its capacity since it has an excessive amount of its assets tied up in cash positions."
He estimates that Citigroup has $184 billion in cash on its balance sheet, the equivalent to 9.6% of its assets, and suggests the bank is losing almost $1.65 per share in earnings because of the capital build-up.
"The bank's balance sheet is indicating that this company is operating well below the balance sheet's earning capacity," Bove writes. "It may never report numbers that equal its true earnings capacity, but it is comforting to know that the bank's balance sheet is in a better state than it has been for a considerable period of time."
Keefe, Bruyette & Woods lifted its estimates on the company Monday following the second-quarter report. The firm now sees profits of 27 cents a share in fiscal 2010 and 25 cents a share in fiscal 2011, up from prior views of 7 cents and 15 cents for the respective periods.
reported its second consecutive profitable quarter on Friday since the financial crisis began. The performance topped Wall Street's consensus view but was still below its year-ago and first-quarter results.
The earnings beat was primarily due to lower credit costs, but both equity and fixed-income analysts offered generally positive reactions to Citigroup's numbers and overall improved capital position. Multiple analysts have upped earnings estimates for the bank for the second half and full year.
, the current average analysts' estimates are for Citigroup to earn 7 cents a share for the third quarter, and 37 cents a share for fiscal 2010.
Using Friday's closing price, the stock is up 3.7% this month as the U.S. Treasury, which is in the process of selling common shares related to the TARP program, halted its open-market sales for two weeks prior to Citigroup's quarterly release.
--Written by Laurie Kulikowski in New York.
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