Citigroup Primed for Capital Return in 2013

NEW YORK ( TheStreet) -- Citigroup ( C) is sitting on $63 billion in excess capital and is well positioned to begin returning capital to shareholders during 2013, according to Atlantic Equities analyst Richard State.

Citigroup's estimated Basel III Tier 1 common equity ratio was 7.9% as of June 30, increasing from 7.2% the previous quarter, and matching JPMorgan Chase's ( JPM) estimated Basel III ratio at the end of the second quarter. Before JPMorgan suspended its share repurchase program in May, after disclosing large hedge trading losses , the company had been approved by the Federal Reserve to buy back $12 billion worth of shares during 2012, with another $3 billion in buybacks authorized for 2013.

Citigroup continues to follow Vikram Pandit's "good bank/bad bank" strategy to reduce its balance sheet by allowing noncore assets to runoff within Citi Holdings, while focusing on growing revenues from main subsidiary Citicorp. With Citigroup on Monday disclosing that Citicorp had $930 billion in risk-weighted assets under Basel III -- while Citi Holdings had $323 billion in RWA -- Staite said that "thus arguably Citicorp only needs $88bn of capital to operate assuming a 9.5% ratio" of Tier 1 common equity to risk-weighted assets, under Basel III.

Staite said that "given that Citigroup has $151bn of tangible common equity but only needs $88bn to run Citicorp it shows that there is a further $63bn that is currently trapped within Citi Holdings and the deferred tax assets, or DTA."

"This is capital that should be available to be returned to shareholders at some point assuming the group can utilize the DTA and that the $10bn of loan loss reserves within Holdings is sufficient to cover losses," the analyst said.

The Federal Reserve in March rejected Citigroup's initial plan to return capital to investors this year through a dividend increase and/or share buybacks.

During the company's second-quarter conference call on Monday, Pandit said that the company's "priority right now is earnings generation," which has the company expecting its Basel III Tier 1 common equity ratio "to be above 8% and maybe more by year-end." The CEO added that "we are committed to creating returns for you and returning capital," but that the timing of the return of capital "is a decision that's made by us with the regulators."

While the Federal Reserve "took a cautious view early this year," Staite believes "the fact that the Basel III ratio has reached 7.9%, the same as JP Morgan bodes well for the start of a capital return in 2013."

Staite rates Citigroup "Overweight," with a $44 price target, and estimates the company will earn $3.81 a share for all of 2012, followed by 2013 EPS of $4.89.

Total assets in Citi Holdings "declined $18 billion linked quarter to $191 billion," as of June 30, with the unit's total assets "down 28% from year-ago levels," and now accounting for "approximately 10% of total Citigroup assets," according to KBW analyst David Konrad.

Citigroup's shares closed at $26.81, returning 2% year-to-date, after dropping 44% during 2011.

C Chart C data by YCharts

The shares trade for just over half their reported June 30 tangible book value of $51.81, and for less than six times the consensus 2013 earnings estimate of $4.54, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.04.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.