Citigroup Could Jump 33% as Unwanted Assets Decline, Hawken Says

Shares in Citigroup Inc. (C), the third-biggest U.S. bank, could increase by about 33 percent in 12 months as the lender reduces unwanted assets and management cuts costs, according to Brennan Hawken, an analyst at UBS AG. (UBS)

The stock may rise as the New York-based lender reduces the amount of money it holds against distressed assets in the Citi Holdings division while losses from the unit also decline, Hawken wrote in a note to clients today, upgrading his rating to buy from neutral. Shares could increase to $62 within a year, Hawken said, 33 percent more than its closing price on Friday of $46.68.

Chief Executive Officer Michael Corbat is reducing unwanted assets in Citi Holdings while firing 11,000 workers and pulling back from certain markets to improve profit. The division had about $92 billion of U.S. home loans at the end of 2012, which should be easier to reduce as the housing market improves, Hawken wrote.

“We tried to think about which universal banks and brokers are under-earnings right now and when will a recovery in earnings become evident,” Hawken wrote. “The most clear candidate on this front is Citi, given the meaningful earnings headwind and large amount of trapped capital in Citi Holdings.”

Citigroup gained 10 cents, or less than one percent, to $46.78 at 11:44 a.m. in New York trading. The stock has gained 18 percent this year, outpacing the 24-company KBW Bank Index (BKX), which increased 11 percent.

Unwanted Assets

Corbat, 52, used to run Citi Holdings, which was created by his predecessor Vikram Pandit, 56, as a home for unwanted and unprofitable assets in the wake of the bank’s $45 billion bailout in 2008. Citigroup had $156 billion of total assets in the division at the end of 2012, down 31 percent from a year earlier, according to a financial supplement.

The bank is “excessively conservative” in the amount of money it holds as a buffer against potential losses from the mortgages in Citi Holdings, Hawken wrote. The company could release about $2 billion from these reserves in 2013 and $2.2 billion in 2014, according to the note.

“Citi has more capital trapped on its balance sheet than any other universal bank, and we believe a healing housing market and moderately improving economic outlook in the U.S. provides a much needed tailwind for Citi to release it,” Hawken wrote.

Losses at Citi Holdings should plunge to $1.7 billion this year and just under $1 billion in 2014, Hawken wrote. This would compare with losses of $6.56 billion in 2012 and $4.22 billion in 2011.

Analysts’ Estimates

Moshe Orenbuch, an analyst with Credit Suisse Group AG, predicts that the division will lose $3.1 billion this year and $1.7 billion in 2014. John McDonald of Sanford C. Bernstein & Co. projects a $1.63 billion loss in 2013 and an $856 million loss next year. Both analysts have outperform ratings on the shares.

Citigroup houses its distressed mortgages within the local consumer-lending unit of Citi Holdings. Losses there should tumble to $1.01 billion this year and $370 million in 2014, Hawken wrote, compared with a loss of about $7.6 billion for the two prior years combined.

Orenbuch estimates that the unit will lose $2.38 billion this year and $1.1 billion in 2014. McDonald predicts a $1.3 billion loss in 2013 and a $649 million loss next year.

To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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