Citigroup Shares Climb With Whitney Upgrade (Update 1)

Updated with news of upgrade from Meredith Whitney, executive compensation rejection

NEW YORK ( TheStreet) - Long-time Citigroup ( C) bear Meredith Whitney upgraded the stock to a hold from an underperform rating on Tuesday, in light of improved operating metrics.

Shares of Citigroup surged nearly 4% in post-noon trading. Whitney was among the early analysts to predict that Citigroup will be forced to reduce its dividend and raise capital in 2007.

"Coincident with 1Q12 earnings, we are upgrading C shares to HOLD from UNDERPERFORM, as improving operating metrics and a still historically low valuation temper the probability of a significant absolute share price decline," Whitney wrote in a report.

The analyst expects Citi to handily make its capital target of over 8% by the end of 2012. She also highlighted expense control as the single largest question for Citi's investors, and a "necessary precondition" of Citi reaching its 1.25-1.50% return on asset target.

Several analysts also raised their earnings estimates and price targets on Citi after the bank showed an improvement in operational performance across its businesses in the first quarter.

Despite a series of special items that muddled the profit picture, Citigroup managed to impress analysts with its strong recovery in trading revenues, continued loan growth and tighter control on expenses across businesses.

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Citigroup also disclosed for the first time a proforma Basel III Tier I capital ratio of 7.2%. It also said it may consider re-submitting a capital request plan in June, although it seems unlikely the bank will be able to make any buybacks before the fourth quarter of 2012.

Morgan Stanley analyst Betsy Graseck increased her price target on the stock by 7% to $45 though she maintained an equal weight rating. She also raised estimates for 2012 and 2013 by 17% and 11% respectively. The analyst sees "consistent positive operating leverage" as "critical" and expects capital returns to begin in earnest only in 2013.

"Citi generated solid results in 1Q11, and while management's tone on the conf call was conservative, we believe Citi's results should continue to show momentum," UBS analyst Brennan Hawken said in a report. The analyst raised his 2012 estimate by 5 cents to $4.05 on lower operating expenses and higher trading revenue. He also gave credit to Citis progress in risk management including winding down Citi Holdings.

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Despite the positive analyst reactions, the median price targets of various analysts for Citigroup was $43.75, according to Thomson Reuters which still places it at a discount to tangible book value. Citi Holdings, which houses non-core assets that the bank intends to wind down or sell, appears to be what's holding down Citigroup's valuations.

"Although Citigroup appears cheap at 67% of TBV, the consolidated earnings multiple is not inexpensive at almost 11.3x 2012 estimates excluding reserve release. However, excluding Citi Holdings, this multiple drops to below 7.0x," KBW analyst David Konrad said in a note. However, "potential softer trading over the summer and delays in capital deployment leave limited catalysts" for Citigroup in KBW's view.

Oppenheimer's Chris Kotowski noted that Citi Holdings was still a 36 cent drag on the earnings per share. "The ongoing businesses in Citicorp earned an ROE of about 15%, which obviously would deserve a much higher multiple than what the shares are currently being awarded," the analyst noted.

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The flood of positive analyst reports seemed to be overshadowing news that shareholders voted down the executive compensation plan in the bank's annual shareholder meeting.

That would be another blow for CEO Vikram Pandit, who was awarded a pay package of about $15 million in 2011.

-- Written by Shanthi Bharatwaj in New York--
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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