Citigroup: Post-Pandit Glow Winner

NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among the largest U.S. banks on Monday with shares rising over 1% to close at $36.42.

The broad indexes ended Veterans Day flat, as eurozone finance ministers in Brussels to discuss the release of bailout money to Greece, after Greece's Parliament passed the required austerity budget over the weekend.

In a major piece of M&A news for the brokerage industry, Jefferies ( JEFF) announced an agreement early Monday to be acquired by Leucadia ( LUK), in an all-stock deal that values Jefferies at approximately $3.6 billion. Leucadia already held a 28.6% stake in Jefferies, and agreed to exchange 0.81 LUK shares for each remaining Jefferies share. Based on Friday's closing prices, the deal valued Jefferies at $17.66 a share, which was a 24% premium. Shares of Jefferies rose 14% to close at $16.27.

The Leucadia deal will allow Jefferies to continue operating independently, with a much stronger capital base.

The market appeared to stabilize after last week's election turmoil, although the looming "fiscal cliff," continued to dominate the news. President Obama and Republican members of Congress have both indicated some willingness to compromise, in order to avoid the expiration of income tax cuts passed while George W. Bush was president and extended by Obama in 2010.

The August 2010 agreement between President Obama and the Republican majority in the House of Representatives to raise the federal debt ceiling requires a major cut in federal spending, along with the expiration of the tax cuts beginning next year, unless another deal is struck.

KBW analyst Fred Cannon on Monday said that last week's selloff of financial stocks "represented Round 1 in share trading on Fiscal Cliff worries, and is likely indicative of trading in future rounds of investor concerns as debates rage in Washington on the Fiscal Cliff." Cannon said that "although we expect the Fiscal Cliff to be averted, we doubt any definitive action will happen before December."

The Federal Reserve is expected to release the economic scenarios to be used in its 2013 round of bank stress tests this week, and "the severity of the scenarios they release could determine the level of capital distribution from those firms in 2013," according to Cannon.

When the Fed completed its 2012 stress tests in March, investors cheered as many of the nation's largest banks, including JPMorgan Chase, Wells Fargo, and U.S. Bancorp, announced dividend increases and regulatory approval for significant repurchases of common shares. Citigroup's initial capital plan -- which would have included an increased quarterly dividend, as well as share buybacks -- was rejected by the Fed, while a revised capital plan, which included no increased capital return to investors, was approved in August.

This time around, the Fed will allow a much quicker resubmission of revised capital plans for banks whose initial plans are rejected, which according to Barclays analyst Jason Goldberg "would have helped Citigroup and SunTrust ( STI) this year."

Goldberg said that the Fed's recent approval for PMorgan Chase to restart its stock repurchase plan with $3 billion in buybacks during the first quarter -- after the buybacks were suspended in the second quarter, after CEO James Dimon first announced the company's hedge-trading losses -- was one of three "positive data points" for banks last week.

Once again, the stress tests are likely to be a positive event for most of the banks involved, and analysts are expecting several of the largest banks to significantly increase their payouts next year. Goldberg said that "over the past year, employment and housing data has improved, while the group has built capital. In fact, if one takes current tier 1 common ratios and applies the haircut used in last year's CCAR process, this lot has over $150bn in excess capital."

In the wake of CEO Vikram Pandit's ouster and replacement with Michael Corbat, investors are looking for a more aggressive approach from Citigroup on the disposition of noncore assets and return of capital. Corbat formerly headed Citi Holdings, which is the subsidiary into which the company placed noncore assets, as part of Pandit's "good bank/bad bank" strategy of right-sizing the company's balance sheet.

Goldberg expects Citigroup in the second quarter of 2013 to increase its quarterly dividend from the current nominal payout of a penny, to 15 cents. The analyst also expects Citi to be granted approval to buy back $2 billion worth of common shares next year.

Bank of America Merrill Lynch analyst Erika Penala on Monday reiterated her "Buy" rating for Citigroup, calling the company "the one discounted, real recovery story left in U.S. banks - a recovery that we believe is clearly on track, as affirmed by 3Q12 results."

Penala's price objective for Citigroup is $45, and she expects the company to return roughly $4 billion in capital to investors during 2013.

"Over time, we expect C to return 11% of market-cap to shareholders," Penala said, adding that "an approval in Mar '13 would not only establish C as a capital return story, but could give investors confidence that there are no 'tail risk' issues -key for money center multiples to re-rate higher."

Citigroup's multiples are particularly low. 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 $4.64 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.04.

Citi's shares have now returned 39% year-to-date, following a 44% decline during 2011.

C Chart C data by YCharts

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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 TheStreet.com 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.