Citigroup: Financial Winner

NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among the largest U.S. financial names on Monday, with shares rising over 4% to close at $28.56.

The broad indexes continued to rise after Friday's rally, which followed the Labor Department's announcement that nonfarm payrolls rose by 163,000 in July, which was way ahead of the 100,000 new jobs expected by economists polled by Thomson Reuters, and the largest monthly employment growth number since February.

UBS economist Maury Harris said that "although payrolls posted solid gains, the drop in labor force participation and the modest uptick in the unemployment rate, if sustained, may make it more difficult for the Federal Reserve Open Market Committee to hold off on further easing." On the other hand, Harris said that "away from the headline numbers, we see some cause for optimism that labor market trends could allow the Fed to hold off on easing in September."

The biggest banking splash of the day was made by the New York State Department of Financial Services, which ordered the New York branch of Standard Chartered Bank to appear on August 15 in front of Superintendent of Financial Services Benjamin Lawsky "demonstrate why SCB‟s license to operate in the State of New York should not be revoked," after the bank was accused of having "designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealings with Iran - dealings that indisputably helped sustain a global threat to peace and stability."

In a 27-page order, New York State regulators said that Standard Chartered Bank "schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees."

In addition to having a representative of the bank appear before the superintendent and explain its actions, the bank was ordered to "submit to and pay for an independent, on-premises monitor of the Department's selection to ensure compliance with rules governing the international transfer of funds."

In its unusually colorful regulatory order, the New York State Department of Financial Services said that after Standard Chartered Bank's CEO for the Americas sent a "panicked message to the Group Executive Director in London" saying that the bank's business with Iran needed "urgent reviewing at the Group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group," the Group Director "caustically replied: 'You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians.'"

Of course, the Group Director may have forgotten that the Iranian transactions in question were being funneled through the United States.

Extreme volatility continued for Knight Capital Group ( KCG), with shares plunging over 24% to close at $3.07, after the Jersey City, N.J., market maker and facilitator of electronic transactions announced that a group of investors -- including Jefferies Group ( JEF), Blackstone ( BX), Getco, Stephens, Stifel Financial ( SF) and TD Ameritrade ( AMTD) -- had "agreed to purchase an aggregate of $400 million of 2% convertible preferred stock," which "will be convertible into approximately 267 million shares of common stock of the Company."

The conversion price is $1.50 a share, with the deal likely handing the investor group 70% of Knight Capital Group's common shares.

Knight Capital's shares had declined 63% on Thursday, after the company announced a pretax loss of $440 million caused by glitches in its trading software on Wednesday, which left the company with "at least $4.5 billion worth of securities it hadn't planned to buy," according to a Wall Street Journal report. The Journal also reported that Goldman Sachs ( GS) stepped in to buy the unwanted securities from Knight to escape the erroneous trading positions and announce the loss.

The shares then bounced back 57% on Friday, to close at $4.05, after the company secured a credit line allowing it to continue operating for another day.

Turning to the Insurance industry, Shares of American International Group ( AIG) rose over 2% to close at $32.09, following an announcement by the U.S. Treasury that after completing a $5 billion offering of government government-held shares of AIG on Friday, the overallotment on the offering was exercised, leaving the Treasury expecting its proceeds from the offering to increase "to approximately $5.75 billion and the total number of shares sold in the offering to approximately 188.5 million."

The Treasury said that following the offering -- with AIG purchasing about $3 billion worth of the shares -- the government would be left holding roughly 53% of the company's common shares, worth about $24.2 billion.

The KBW Bank Index ( I:BKX) on Monday rose slightly to close at 46.12, with all but seven of the 24 index components showing declines.

Citigroup's shares have now returned 9% year-to-date, following a 44% decline during 2011.

The shares are trading for relatively low multiples of 0.6 times their reported June 30 tangible book value of $51.81, and for six times the consensus 2013 earnings estimate of $4.54, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.09.

Sterne Agee analyst Todd Hagerman rates Citigroup a "Buy," and said on July 16 after the company reported its second-quarter earnings that "although C's core operating performance will likely slow in the coming quarters, increasing capital flexibility, positive operating leverage, and a depressed valuation continue to offer a favorable risk/reward at current levels."

Hagerman's price target for Citi's shares is $33, and the analyst estimates the company will earn $3.92 a share for all of 2012, followed by 2013 EPS of $4.30.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.


-- 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.

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