Citigroup Still Loved by KBW, Despite Downgrades

NEW YORK (TheStreet) -- While two competing firms this week cut their ratings on Citigroup (C), KBW analyst Frederick Cannon is keeping the faith, calling Citi "a compelling investment, on both an absolute and relative basis."

Cannon rates Citigroup "outperform," with a $58 price target, representing potential upside of 14% over the next 12 months from the stock's closing price of $51.06 on Thursday.

Goldman Sachs analyst Richard Ramsden on Tuesday downgraded Citigroup to a neutral rating from a "buy" rating, writing in a client note that efficiency improvements and the continued wind-down of runoff subsidiary Citi Holdings was already baked into the share price.  With "less 'low hanging fruit' to improve returns from here, we believe current valuation more accurately reflects Citi's core earnings power," he wrote.  Despite the neutral rating, Ramsden's price target for Citigroup is $60, which his higher than Cannon's price target. 

On Wednesday, Deutsche Bank analyst Matt O'Connor downgraded Citigroup to a "hold" rating from a "buy" rating, as part of his advice to investors to cut risk in advance of the Federal Reserve's tapering of "QE3" bond purchasesQE3 tapering, and in light of continued headline risk from regulatory actions such as the finalization of the Volcker Rule expected next week.  O'Connor also lowered his price target for citi's shares to $56 from $61.00.

Cannon in a client note on Thursday wrote, "On an absolute basis, the stock trades below tangible book value and has a management team focused on improved profitability and on making the company smaller, simpler and safer which is in line with regulatory demands."

Citigroup's return on average assets (ROA) for the first three quarters of 2013 was 0.80% and its return on average tangible common equity (ROTCE) was 8.95%, according to Thomson Reuters Bank Insight.  "If C can achieve its stated financial goals by 2015 of 90 to 110 basis point ROA and 10% ROTCE shares should trade meaningfully higher," according to Cannon.

"On a relative basis, C is the only large-cap U.S. bank still trading below tangible book value, yet has one of the strongest capital positions," Cannon added.  Here's a quick comparison of stock price multiples, ROA and ROTCE for the "big four" U.S. banks.

Citigroup's shares trade for 0.9 times tangible book value, according to Thomson Reuters Bank Insight, and for  9.4 times the consensus 2014 earnings estimate of $5.41 a share.  The consensus 2015 EPS estimate is $5.95.

Here's a quick comparison of stock price multiples, ROA and ROTCE for the other members of the "big four" group of U.S. banks:

  • Shares of JPMorgan Chase (JPM) closed at $55.82 Thursday and traded for 1.5 times tangible book value and 9.3 times the consensus 2014 EPS estimate of $6.01.  The consensus 2015 EPS estimate is $6.36.  The company's ROA for the first three quarters of 2013 was 0.71% and its ROTCE was 11.59%.  JPMorgan's returns reflected the company's third-quarter loss, brought about by a $9.15 billion provision for litigation reserves.
  • Bank of America (BAC) closed at $15.43 Thursday and traded for 1.2 times tangible book value and 11.5 times the consensus 2014 EPS estimate of $1.34.  The consensus 2015 EPS estimate is $1.60.  The bank's ROA for the first three quarters of 2013 was 0.49% and its ROTCE was 7.44%.
  • Wells Fargo's (WFC) stock closed at $43.25 Thursday and traded for 2.2 times tangible book value and 10.8 times the consensus 2014 EPS estimate of $4.01.  The consensus 2015 EPS estimate is $4.23.  Wells Fargo ROA for the first three quarters of 2013 was 1.52% and its ROTCE was 17.86%.
Those valuations show that investors are looking ahead, with expectations for accelerating economic growth.  Bank of America's stock trades at the highest forward price-to-earnings valuation for the group, despite having the weakest earnings performance this year.

Getting back to Citigroup, Cannon expects the company's tangible book value per share to hit $65 during 2015, so if the shares trade up to tangible book value, you're looking at upside. 

Citigroup expects to deploy much more excess capital as Citi Holdings continues to shrink.  KBW estimates that following the next round of Federal Reserve stress tests in March, the company will announce plans to repurchase up to $7.686 billion in common shares through the first quarter of 2015.

Citi's shares were up over 1% in premarket trading to $51.68.

The following chart shows the year-to-date stock performance for Citigroup, as well as the KBW Bank Index (I:BKX) and the S&P 500 :


C ChartC data by YCharts

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-- 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 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.

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