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Analyst Blog

On Sep 2, 2013, we maintained our long-term recommendation on Citigroup Inc. (C - Analyst Report) at Neutral based on the company’s global footprint and attractive core business along with its expansion in the emerging markets. Yet, a low interest-rate environment, an expanding expense base, regulatory issues along with litigation risks remain concerns.

Why Neutral?

Citigroup reported impressive second-quarter 2013 earnings, with a positive surprise of about 6%. Earnings per share came in at $1.25 for the quarter, beating the Zacks Consensus Estimate by 7 cents. Moreover, earnings were up 25% from the prior-year period, driven by higher revenues and lower net credit losses.

Citigroup’s long-term strategy to shrink its non-core assets and increase its fee-based business mix would improve the valuation over time. The run down of Citi Holdings, its legacy problem assets portfolio, is on track. Citi Holdings’ assets decreased 31% from the prior-year quarter to $131 billion and represented only 7% of the company’s total asset at the end of second-quarter 2013.

Despite the overall sluggish economic environment, Citigroup’s total deposits surged 2.6% year over year in second-quarter 2013. Therefore, deposit balances are poised to grow amid an improving economy.

However, rising operating expenses remain a major concern for Citigroup. Moreover, the company continues to encounter many investigations and lawsuits from the investors and regulators. Though the company resolved certain litigations related to the sale of risky mortgage backed securities, many of the cases are yet to be resolved. All these factors are expected to lead to increased expenses and litigation provisions in the near term.

Following the release of second-quarter results, the Zacks Consensus Estimate for 2013 has gone up 3.6% to $4.89 per share, over the last 60 days. The Zacks Consensus Estimate for 2014 has also increased by 1.8% to $5.57 per share over the same time frame. With the Zacks Consensus Estimates for both 2013 and 2014 going up, Citigroup now has a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Some major regional banks that are worth considering include BankUnited, Inc. (BKU - Analyst Report) with a Zacks Rank #1 (Strong Buy), while The PNC Financial Services Group, Inc. (PNC - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) carry a Zacks Rank #2 (Buy).

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