Citigroup: Financial Fiscal Cliff Bounce Winner (Update 1)

Updated with market close data and additional information throughout.

NEW YORK ( TheStreet) -- Citigroup ( C) was the winner among the largest U.S. banks on Monday, with shares rising over 4% to close at $39.15.

The Dow Jones Industrial Average was up over 100 points, while the S&P 500 ( SPX.X) and NASDAQ Composite indexes each rose over 1%, as investors celebrated a softening of the position of Speaker of the House John Boehner (R-Ohio) in his budget negotiations with President Obama.

President Obama has insisted that as part of a deal to raise federal revenue and cut spending, in order to avert the Fiscal Cliff, federal income tax rates on couples earning over $250,000 a year must increase. Boehner and the Republican leadership in the House of Representatives had offered to limit deductions and certain tax loopholes in order to raise revenue, with no tax rate increases.

Boehner on Friday said he would support higher tax rates for people earning over $1 million a year. Spokesmen for the president and Boehner both said on Monday that leaders were continuing their discussions at the White House.

Bank stocks lead the market. The KBW Bank Index ( I:BKX) was up 3% to close at 50.62, with all 24 index components showing gains of over 1%.

Large banks showing gains of nearly 4% included Bank of America ( BAC), with shares closing at $11.00; Wells Fargo ( WFC), which closed at $$34.38; and PNC Financial Services Group ( PNC), closing at $57.87.

Writing for Real Money, Jim Cramer said it was "dawning on people that rates could go higher on a fiscal-cliff deal, and we are eventually going to get a deal. Higher rates mean more room for banks to make money."

Bank of America

Nearly all of the recent U.S. economic reports have underlined a steady recovery of home prices, which can lift all boats among the large residential mortgage lenders, including the "big four" U.S. banks. Bank of America, of course, is the most highly leveraged to a housing recovery, because of the company's mortgage mess mainly springing from its purchase of Countrywide Financial in 2008. Bank of America had $25.5 billion in unresolved mortgage repurchase claims as of Sept. 30. In addition to the many challenges the company will bring to investors making the claims, delinquency rates will decline, and claim balances will also decline as home prices rise. In addition to those benefits, the rising home prices will make short-sales or even outright sales of the collateral properties backing the securitized loans easier, thus cancelling some putback claims.

Atlantic Equities analyst Richard State made the case last Wednesday that Bank of America is solidly capitalized and will be approved to return significant capital to investors after the next round of Federal Reserve stress tests in March, saying the company had "already met its Basel III capital requirements in Q3," years in advance of regulatory requirements.

JPMorgan Chase analyst Vivek Juneja on Friday reiterated his "Overweight" rating for Bank of America, while raising his price target for the shares to $13 from $11.50, citing the "significant benefit from potential housing market recovery, potential for significant increase in normalized earnings, ongoing improvement of capital levels, relatively attractive valuation, and position as a leading retail and commercial banking franchise in the US."

Discounted to Book and Ready to Pay

Bank of America's shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48, while Citigroup's shares trade even lower, at 0.7 times their reported Sept. 30 tangible book value of $52.70. These discounts underline the potential for both stocks to outperform during 2013, despite their strong recoveries this year.

For Citigroup, investors will be looking for the company to follow through with former CEO Vikram Pandit's "good bank/bad bank" strategy of parking noncore assets within Citi Holdings, selling them off or winding them down, while freeing up excess capital.

Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that following the stress tests, Citigroup will raise its quarterly dividend from the current nominal penny, to 15 cents.

Wells Fargo

Wells Fargo trades at higher valuations than Citi and BAC, reflecting the company's growing share of the mortgage lending market, as well as its strong earnings performance, with quarterly operating returns on average assets increasing to 1.46% from 1.27% over the past five quarters, according to Thomson Reuters Bank Insight.

The shares trade for 1.7 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.5 times the consensus 2013 EPS estimate of $3.63, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.94.

Based on a quarterly dividend of 22 cents, Wells Fargo's common shares had a dividend yield of 2.56%.

Juneja on Friday said he expected Wells Fargo to receive approval from the Federal Reserve to raise its dividend to 30 cents a share in the second quarter of 2013.

WFC Chart WFC data by YCharts

Interested in more on Wells Fargo? 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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