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Citigroup Sitting at a Crossroads

Citigroup's fleeting foray above $5 underlines the importance of its upcoming first-quarter report for CEO Vikram Pandit.

Update to clarify charts.



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's fleeting foray above $5 this week underlines the importance of its upcoming first-quarter report.

There's no doubt sentiment about the stock is miles better than it was at the start of 2010 as Citigroup has continued to make progress in cleaning up its balance sheet and get back in the game against the other money-center banks, but now that it's battled back, where does it go from here?

The improvement began in early March when a number of respected voices, notably Bruce Berkowitz and independent research firm



made favorable comments about the company

, and the shift has kept up since then as the company did much better than expected with the


(PRI) - Get Primerica, Inc. Report

IPO, and the stock showed itself able to take news that the Treasury would be exiting its 27% stake in 2010 in stride.

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Of course, the rally has been far from company-specific as the bank stocks in general have outperformed, buoyed by the rise in the broad market on the perception that the economy is on stable ground, and Wall Street's belief that credit costs reached an inflection point in the first quarter.

But that doesn't mean Citigroup isn't under particular pressure to meet or exceed investor expectations this quarter, especially after

JPMorgan Chase

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-- a good comparable in many respects -- came through with blowout numbers on Wednesday. The fact that the stock stalled Thursday after breaching $5 for the first time since mid-October, ending in negative territory on massive volume of more than 1.5 billion shares shows there is still some trepidation out there.

Let's not forget, by its own admission, Citigroup still has a long ways to go. CEO Vikram Pandit said Monday the company's goal remains bringing assets down 40% from their third-quarter 2007 peak. That leaves it with nearly

a half trillion

more to shed from its balance sheet.


The current average estimate of analysts polled by

Thomson Reuters

is for Citigroup to post breakeven results on a per share basis for the first three months of the year. That compares to a loss of 18 cents a share in the same period a year earlier, and a loss of 33 cents a share in the fourth quarter.

Loan loss reserves, particularly those related to consumer losses in credit cards and mortgages, remain the largest variable for the company's bottomline. Citigroup recorded a provision of $700 million in the fourth quarter to bring its total allowance for loan losses to $36 billion, or 6.1% of loans.

"Citi, JPMorgan,

Bank of America

(BAC) - Get Bank of America Corp Report

are all a credit recovery story," says Gary Townsend of Hill-Townsend Capital, a private investment management firm focusing on mid-cap banks, ahead of Monday's report. "We're looking for clear signal that credit is improving as we believe it is."

Citigroup's net credit losses of $7.1 billion for the quarter ended Dec. 31 represented its second consecutive decline on a quarterly basis. Managed net credit losses - which include securitized loans -- were approximately $10 billion, down from $11 billion in the third quarter.

Credit Suisse said in a research note earlier this week that it doesn't expect Citigroup will aggressively change its reserve levels because of the uncertainty in the economy.


The ability of Citigroup to bolster revenue during the quarter will be a key for investors trying to determine if the bank is back on track.

"We would note that, like for many of the other companies we cover, for Citigroup the big swing factor in the quarter will be the Institutional Client business, and in particular fixed income trading," Oppenheimer analyst Chris Kotowski wrote in a March 25 note. "Fixed income trading could easily be several hundred million on either side of our estimate, perhaps more, and this difference will be the difference between a small profit or a small loss."

Pandit, in the keynote speech at a company-sponsored investor conference in March, said he was confident the company is "well-positioned to return to sustained profitability," highlighting Citigroup's geographic diversity and the belief that more than half of its potential revenue growth in the future could come from emerging markets.

In addition to those comments, Pandit also set a future goal for a return on assets of between 1.25% and 1.5% vs. the return of 1.15% in 2009, and backed a view for a 5% compounded annual growth rate in assets at that time, another positive bit of news that drove the stock's rise that month.

"Given the great confidence with which CEO Pandit set out a 125-150 basis point

return on asset goal at the company's March 11 investor conference, it seems likely that he was feeling sanguine about prospects for the quarter, and thus we would suspect that there is more room for an upside surprise than for a downside surprise," Kotowski said in a note to clients.

Wall Street's consensus estimate is for Citigroup to report revenue of $20.8 billion for the first quarter.

Stock Performance:

Citigroup shares have now risen nearly 50% year-to-date. The expiration of the Treasury's lock-up period for the sale of its stake on March 16 was once viewed as a dangerous date for the stock but it has gained 24.7% since that time.

Wall Street analysts still have a mostly neutral-to-negative view of the stock. Of the 21 analysts covering the company, only eight have it at either strong buy (2) or buy (6). The majority of the remainder (10) are at hold with underperform and sell getting one and two votes, respectively.

The median 12-month price target of analysts covering the stock is $4.75, a level that at first glance seems reflective of tempered enthusiasm but it shouldn't be forgotten that the shares hadn't closed beyond that level in 2010 until Wednesday's bull run up to $4.93 following JPMorgan's report.

All told, the stock looks primed for a pullback unless the company can come in well ahead of what Wall Street is expecting, and there's a good chance the actual numbers will find it hard to live up to the hype.


If CEO Pandit could somehow eke out real profit in the first quarter, especially given the effort he has been making to tell Wall Street how different today's Citigroup is from its troubled former self, it will go a long way for both the company and confidence in him as a leader. Excluding the gain that Citigroup posted in the second quarter of 2009, which was mainly from the sale of a majority stake in Smith Barney to

Morgan Stanley

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, Citigroup has reported nothing but losses since the fourth quarter of 2007.

Chatter about whether or not Pandit is truly up for the job of turning Citigroup around seems to have subsided along with the stock's rally, but he still has to deliver. That kind of talk will perk up quickly if the company falters and the stock reverses course.

Also, now that the investment community has greater clarity on the government's proposed plan to sell its stake, observers will be carefully listening to Citigroup's remarks surrounding the credit story.

Wall Street will also want commentary on what businesses within Citi Holdings could be sold in the near future. The market cheered this week's news of a relatively small sale of hedge fund assets, and it won't hurt for the company to keep a steady line of non-core businesses moving out the door.

--Written by Laurie Kulikowski in New York.