March 19 (Bloomberg) -- Investors in Citigroup Inc., the U.S. bank that took the most government aid during the financial crisis, should consider selling shares after stress tests showed the lender is vulnerable to an economic downturn, said Charles Peabody, an analyst at Portales Partners LLC.
“If you think the second half of the year is going to show economic weakness, then you want to sell a Citigroup,” Peabody said in an interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The sensitivity of their portfolio to an economic downturn is much greater than anyone else’s.”
The Federal Reserve required financial firms with more than $50 billion in assets to submit capital plans that would demonstrate whether the industry can withstand another crisis. U.S. banks deemed strong enough, including JPMorgan Chase & Co., were cleared to raise dividends and repurchase shares.
Citigroup was among four lenders whose capital plans failed after the central bank estimated that, under the New York-based lender’s capital proposal, it might fall short of requirements in a stressed scenario. While the capital distribution plans approved by the Fed last week helped financial stocks continue recent gains, Peabody said a slowing global economy could halt the advance.
“We’re going to have a very anemic second half and with the possibility of a recession by 2013,” Peabody said. “Banks are cyclical beasts, and there’s no getting around it, they underperform or sell off going into a recession. I think we’re putting in a top on the financial stocks.”
Citigroup climbed 44 percent this year and 7.5 percent since the March 13 Fed stress-test results were released. The 24-company KBW Bank Index advanced 28 percent this year and 4.5 since the Fed results. The bank’s shares advanced $1.36, or 3.7 percent, to $38.05 in New York trading at 11:07 a.m.
Peabody changed his recommendation on Citigroup to underperform, meaning he expects the stock to return less than the average of its peers, the day after the stress-test results. He had rated the stock outperform.
To contact the reporter on this story: Patrick Clark in New York at firstname.lastname@example.org
To contact the editor responsible for this story: David Scheer at email@example.com