Citi Still Offers Great Value, Despite Government and Legal Issues

NEW YORK (TheStreet) -- To say Citigroup (C) has an image problem would be a gross understatement.

Investors paid dearly when Citi's capital plans (more on the plan below) were shot down by the Federal government, a move that blocked it from paying a juicy dividend. When the company reports Monday, it must convince investors that it is financially sound and that the Fed will be on its side the next time around. Despite all this, it is an attractive buy. The stock closed Friday at $47, up 10  cents.

With the Citi stock closing Thursday at $46.90, shares are down 10% on the year to date, trailing the banking sector's 5.41% gain.

Shares have shown no signs of life as the bank deals with allegations of having sold questionable mortgage loans to consumers. Some believe Citi's alleged shady loan practices lead to the financial crisis from which our economy is still recovering.

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According to reports, a proposed $7 billion settlement with the U.S. Justice Department is expected as early as next week. This is $3 billion more than the $4 billion Citi expected to pay.

This is no cause for disappointment, however.

Citi hasn't been alone in this. JPMorgan Chase (JPM), which is often considered better-managed, has dealt with similar issues. JPMorgan eventually settled its own charges for $12 billion, 71% more than what Citi is on the hook for.

What I think is more important, at this point, is for investors to focus on how management plans to move Citi beyond this issue. To what extent can management maintain the bank's core banking operation? That should be a top priority. For that to happen, Citi must return to growing its mortgage business and refocus on its credit-cost reduction, among other needs.

Next, it needs to regain the trust of the Federal Reserve, which, earlier this year, rejected management's $6.4 billion share buyback proposal. The bank, which failed its annual stress test, was considered "fiscally unfit" to return such a large amount to shareholders. The stock still has not recovered its 6% decline since that announcement.

Having been granted a 6-month extension, Citi now has until January 2015 to demonstrate to the Federal Reserve that it has an executable capital plan -- one that comes with not as much risk. But that, too, must be understood. Keep in mind, money is not made without risk.

Citi is the nation's fourth-largest bank by assets. Plus it has the largest global reach among the major banks -- topping Wells Fargo (WFC), Bank of America (BAC) and JPMorgan.

This global power also means that Citi is highly levered to the global economy. Not to mention, Citi still has a strong dependency on the housing recovery. Depending on who you ask, both the global economy and U.S. housing are on the uptrend.

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