Citi on Path to Higher Capital Return: Analysts

NEW YORK ( TheStreet) -- Citigroup's ( C) superior performance in the Federal Reserve's annual stress tests suggests that the bank has made progress in de-risking its balance sheet and is well-placed to return more capital to shareholders, analysts said in early reactions to the results.

Citi's results were a "clear standout", Bank of America analyst Erika Penala said in a note, noting that Citi's stressed capital ratio of 8.9% (8.3% minimum) exceeded her estimate of 6.6%, implying "significant long-term capital return capacity."

The Federal Reserve's estimated $55 billion in losses for Citigroup through 2014 in a severe recession "were 18% lower than last year and 34% lower than our estimate - suggesting a de-risked balance sheet. This is important for a stock trading below TBV tangible book value , as market multiples improve as investor feel more comfortable about balance sheet risk," Penala wrote.

The analyst reiterated her buy rating and raised her target price on the stock to $50 from $46.

Shares of Citigroup were up 2% in early trading, to $45.79.

The Federal Reserve said after the close on Thursday that 17 of the 18 largest banks passed the regulator's annual test that gauges the ability of banks to withstand a deep recession.

Citigroup's performance bettered its "big four" peers -- including JPMorgan Chase ( JPM), Bank of America ( BAC) and Wells Fargo ( WFC) -- in a "severely adverse scenario" that included a 12% unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

Citigroup's projected Tier I Common ratio was projected to fall to a minimum of 8.3% from 12.7%, leaving it a significant cushion over the regulatory minimum of 5%. Meanwhile, Wells Fargo and JPMorgan, which are known for their fortress balance sheets, saw projected minimum Tier 1 common ratios of 7% and 6.3%, respectively, under the scenario .

Atlantic Equities analyst Richard Staite noted Citi's improvement in performance over the previous year. "Not only did Citi go into the test with a higher Tier 1 common ratio at 12.7% vs 11.7% but the stress impact was less at 4.4% vs 5.8% last year," he wrote. "Thus its minimum ratio through the test was 8.3% vs 5.9% leaving it with a $32bn capital cushion vs only $9bn last year."

Bank of America saw its cushion increase to $21.5 billion from $9 billion. Wells Fargo has a capital cushion of $21.3 billion, while JPMorgan has $16.9 billion in excess regulatory capital, according to the Federal Reserve.

In a departure from last year, the Fed will release its decision on banks' capital deployment plans a week later on Thursday, March 14. The regulator hopes to engage in discussions with banks on their capital return plans and give the banks time to alter their requests if necessary.

However, Citigroup announced Thursday that it had requested a $1.2 billion buyback and had not asked for permission to increase its annual dividend from 4 cents a share.

Considering Citi's performance in the test, the low request may come as a disappointment to some investors.

KBW analyst Fred Cannon believes Citi's unexpected disclosure of its buyback plan might have been released to "limit the potential volatility in the company's stock as investors may have expected a large capital deployment in 2013 given the healthy stress test capital ratios." The analyst expects Citi to resume "meaningful capital deployment" in 2014.

-- Written by Shanthi Bharatwaj in New York.

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