Citi Earnings: What to Expect

NEW YORK ( TheStreet) -- Citigroup ( C) appears poised to report its first profitable year since 2007 on Tuesday, at which point investor focus will shift toward growth.

Citi, the first "supermarket" bank in the U.S., was the one that arguably got into the most trouble during the financial crisis. The U.S. Treasury Department had to convert its $45 billion preferred stake into common stock in 2009 and just recently sold off the last bit of its investment.

For the first time since the financial crisis touched off, Citi has been in the black every quarter so far this year. The New York-based bank earned $9.3billion, or 31 cents per share, during the first nine months of 2010, vs. a loss of $6 billion, or 19 cents per share, over the same period a year earlier.

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Wall Street expects Citi to report earnings of 8 cents per share for the fourth quarter on revenue of $20.5 billion, according to Thomson-Reuters -- which would be a drastic change from its loss of 33 cents per share in the fourth quarter of 2009. For all of 2010, analysts expect the firm to report a profit of 40 cents per share, vs. a loss of 80 cents per share in 2009.

Unlike money center competitors like JPMorgan Chase and Wells Fargo ( WFC), few expect Citi to increase its dividend in 2011.

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But just because it's a few steps behind some peers doesn't mean Citi should be ignored. In fact, its stock has remained far more resilient than other big banks through the regulatory reform and foreclosure battles of 2010, partly because it was so cheap relative to book value and forward-looking earnings. The share price recently started holding its ground above the $5 level, hitting a new 52-week high of $5.15 on Friday.

"Over the past two years, Citigroup has moved toward a more customer-driven model and run-down its problem legacy assets, which should ultimately reduce its risk and free up capital/resources," says Jason Goldberg, a sell-side analyst who covers Citi for Barclays Capital. "In addition, its international diversification should give it another source of loan growth and mitigate the impact of U.S. financial reform."

Goldberg rates Citi's stock outperform with a $6 price target. He will be keeping an eye on how much progress Citi has made in divesting noncore holdings, as well as any additional color management provides on the timing of a dividend increase. Goldberg will also be listening for indications of where credit costs are headed in the near-term.

Credit Suisse analyst Moshe Orenbuch is less bullish on Citi, rating the stock a neutral with a $5.75 target price. He believes Citi's trading results will decline 8% from the previous quarter. While Orenbuch forecasts lower credit losses, he thinks Citi's investments in its core businesses may offset an estimated $1.7 billion in reserve releasing.

"While top line growth will remain a challenge in the quarter, as expected, the underlying earnings growth of the large banks will be strong," Orenbuch says in an outlook for the sector. Instead of Citi, he advocates buying JPMorgan Chase ( JPM) and U.S. Bancorp ( USB) for their strong balance sheets and Bank of America ( USB) on valuation, however.

However, Wall Street is still generally bullish on Citi's outlook, even as the stock has it has surged 30% in recent months, from levels below $4 as recently as September. Of the 22 analysts who cover Citi shares, 13 rate it a buy or strong buy, vs. two sell ratings and seven who advise holding the stock instead of actively purchasing.

According to one of those bulls, Deutsche Bank's Matt O'Connor, Citi should benefit from less regulatory drag, credit improvements, a rise in long interest rates that will help net interest margins, M&A activity, better expense savings and potential increase in loan demand from a healthier economy. Additionally, his analysis shows Citi's share price relative to earnings per share is less expensive than 14 of 15 peers in the large bank or regional bank space, at 11.3 vs. a 14.3 median.

"The government's exit of Citigroup removed a significant overhang at the company and we think there will be more interest in the C story in 2011--starting with 4Q10 results," says O'Connor. "Another quarter of solid profitability..., progress running down Citi Holdings, and improving credit should help this." -- Written by Lauren Tara LaCapra in New York.

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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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