Citigroup: Shakeup Surprise Winner

NEW YORK ( TheStreet) -- Despite the bizarre timing of CEO Vikram Pandit's resignation, shares of Citigroup ( C) rose 2% on Tuesday to close at $37.25.

The broad indexes all saw 1% gains, after strong earnings reports from Goldman Sachs ( GS), Coca-Cola ( KO) and Johnson & Johnson ( JNJ).

The KBW Bank Index ( I:BKX) declined slightly to close at 50.26, with 16 of the 24 index components down for the session.
Citigroup announced before the market open that Pandit resigned, effective immediately, with no explanation why.

Citi president and chief operating officer John Havens -- who along with Pandit joined the company in 2007 -- also resigned, one day after investors sent Citigroup's shares up 5.5%, after the company reported good third-quarter results.

Pandit's long-term "good bank/bad bank" strategy for Citigroup was to right-size the company's balance sheet and free up capital by placing noncore assets within the Citi Holdings subsidiary, and allowing them to run-off. This strategy was a success, with total assets of Citi Holdings declining by 31% from a year earlier, to $171 billion, and making up just 9% of the company's total assets.

Citigroup's board of directors ""elected Michael Corbat CEO and a director of the Board," after he previously served as the company's CEO of Europe, Middle East and Africa, and also headed Citi Holdings.

In an interview with Bloomberg, Pandit insisted that the decision to leave was his: "Certainly I wouldn't have done this unless I thought it was the right time. This is a decision I made, after the third quarter, particularly after the great reaction" among investors.

"I don't believe in having lame-duck sessions. I don't believe in having the outgoing CEO looking over the shoulder of the new CEO," he said.

Pandit also said he felt "very good about the decisions that we've made," that "it's hard to come up with things that should have been done differently. I was first out of the box to raise capital."

"The job was about transformation and turnaround, and we've done the turnaround," he said.

Writing for Real Money, Jim Cramer said that Pandit's removal "had nothing to do with compensation or personal ethics, and there was no smoking gun. The board just apparently did not think Pandit could take the company where it needed to go." Cramer went on to call the move "shocking -- shocking to those who know Pandit, and especially shocking because Citigroup has delivered its best quarter since Pandit had taken over. It had the perfect mix of better net interest margin, good growth overseas and improving global market share. This has been accomplished, moreover, at a time when the emerging markets have been doing poorly. That makes it quite an achievement."

Guggenheim analyst Marty Mosby said that the timing of the announcement indicated a serious disagreement between Pandit and Citigroup's board of directors, because "if it was a natural transition of any sort, it would have been announced in January and executed in April," in order to put the new management in place following the filing of the company's annual financial report.

Mosby took comfort that Pandit's exit was "an operating issue, not a financial issue," since CFO John Gerspach didn't resign.

"Getting out of Citi Holdings as quick as possible is really the objective to unleash the value that is still in the franchise," according to Mosby, which may have been the main consideration for the board in selecting Corbat as CEO.

"Commenting on the success of Pandit's strategy, Mosby says "the fundamentals that were reported yesterday support what they have accomplished over the past three to five years."

Mosby rates Citigroup a "Buy," with a $45 price target.

CLSA analyst Mike Mayo has an opposite view of Citigroup, rating the shares "Underperform," with a 12-month price target of $31.00. Mayo wrote that Pandit and Havens were pushed out "in a manner that reflects poor corporate governance," since both "will step down at the same time without any transition and do so literally one day after Citi reported earnings and investors relied on statements given by the CEO."

"A new CEO for Citigroup can be positive," Mayo said, "if it results in more meaningful cultural change. Our view is that the old CEO did not have complete control of the company and that units were permitted to operate too autonomously. In addition, Citigroup had what we considered rigged compensation schemes." Shareholders in April rejected Pandit's pay package in a nonbinding vote.

Mayo said that "the hand-off could not be more awkward for investors to digest - it is tough to get more positive on this stock on this information alone." The analyst's list of items he wants to see addressed by Corbat include eliminating the executive compensation plan that only rewards a small group of remaining executives and "has nothing to do with shareholder value-added processes." Mayo also wants Corbat to sell or spin-off "Citi Holdings assets/businesses or integrate them back into the core franchise," improve risk disclosures, simplify reporting by eliminating the "corporate/other" line items for revenue and expenses, and "be more accessible/accountable to all investors and analysts."

Mayo said that the company's valuation "should take into account the uncertainty in the company's earnings prospects over the next two to three years due to its evolving business model (as Citigroup looks to shed its businesses in Citi Holdings), as well as ongoing country and regulatory/political risks in the USA and abroad."

Citi's have now returned 42% year-to-date, following a 44% decline during 2011.

The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for eight times the consensus 2013 earnings estimate of $4.56 a share, among analysts polled by Thomson Reuters.

C Chart C data by YCharts

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

State Street

Shares of State Street ( STT) of Boston rose 5% to close at $43.53.

The company reported third-quarter net income available to common shareholders of $654 million, or $1.36 a share. The company said that its "GAAP results include d a net pre-tax benefit of $277 million (net after-tax benefit of $166 million, or $0.35 per share)," that included a $362 million benefit from claims related to the Lehman Brothers bankruptcy in 2008, which was partially offset by "$60 million provision for previously disclosed litigation arising out of our asset management and securities lending businesses," and a $25 million charitable contribution.

Excluding the above items, the trust and custody bank reported third-quarter operating earnings of 99 cents a share, beating the consensus estimate of 96 cents. In comparison, the company reported operating EPS of $1.01 the previous quarter, and 96 cents a year earlier.

State Street on Monday completed its acquisition of Goldman Sachs Administration Servies, which the company said made it "the market leader in this fast-growing market in hedge fund administration." The company cited the HFMWeek Assets under Administration Survey, which said that as of May 31, State Street had $505.5 billion in hedge fund servicing assets, while Goldman Sachs had $200.6 billion of assets serviced.

The company's third-quarter return on average common equity was 13.3%, increasing from 10.0% during the second quarter, and 11.2% in the third quarter of last year.

State Street reported total third-quarter operating revenue of $2.3 billion, declining from $2.4 billion both in the second quarter, and during the third quarter of 2011.

The company said that it remained "on track to achieve incremental annual pre-tax operating-basis expense savings in the range of $90 million to $100 million in 2012," and that "the estimated cumulative expense savings through the end of 2012 are expected to be approximately $180 million."

State Street repurchased 11.4 million common shares for $480 million during the third quarter, and said it had "$840 million remaining under its $1.8 billion stock purchase program authorization, effective through March 2013." The company's estimated Basel III Tier 1 common equity ratio was a strong 11.3% as of Sept. 30.

Jefferies analyst Ken Usdin rates State Street a "Hold," with a $47 price target, and said after the earnings announcement that "core EPS is around consensus with expense leverage offsetting a weaker spread income run-rate," and that "fees held up relatively well, especially transaction businesses, in what was a light quarter for volumes/volatility."

State Street's shares have now returned 10% year-to-date, following an 11% decline during 2011.

The shares trade for 10 times the consensus 2013 EPS estimate of $4.32. Based on a 24-cent quarterly payout, the shares have a dividend yield of 2.21%.

STT Chart STT data by YCharts

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


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

>Contact by Email.

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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