Buy Citigroup Options Before Earnings, Goldman Sachs Advises

Goldman Sachs Group Inc. told clients to bet on Citigroup Inc. shares before fourth-quarter earnings later this month as new Chief Executive Officer Michael Corbat cuts costs and withdraws from some markets.

Investors should buy call options on shares in Citigroup before the bank announces its results Jan. 17, Goldman Sachs said today in a note to clients. Calls are contracts that provide the right to buy shares at a certain price. The New York-based firm also added Citigroup to its “conviction buy list” and said shares could rise to $49 within a year.

Corbat, 52, who replaced Vikram Pandit in October, is laying off thousands of workers and pulling out of some countries as he seeks to reduce costs at Citigroup. His plans, announced last month, make the New York-based bank the “best large-cap restructuring story,” Goldman Sachs analysts led by Richard Ramsden said in another note.

“Under new CEO Michael Corbat, we believe Citi is poised to improve returns and increase efficiency,” the analysts wrote. “Citi shares are mispriced given the company’s core earnings power, especially considering further restructuring could generate additional upside for shares.”

Citigroup climbed 2.5 percent to close at $42.43 in New York, outpacing the 1.7 percent gain of the 24-company KBW Bank Index. The shares have increased 7.3 percent this year.

Volume Surges

Goldman Sachs advised clients to purchase calls with the option to buy Citigroup shares at $42 by Jan. 19, two days after Corbat announces his first earnings results as CEO. This will position investors for a potential rally in the stock, according to Goldman Sachs strategists.

Prices for Citigroup calls are “attractive,” the Goldman Sachs strategists wrote. Implied volatility, a key gauge of options prices, for 30-day contracts closest to Citigroup’s current share price slumped 50 percent from its high in May to 27.42 today, according to data compiled by Bloomberg. That’s the lowest level since June 2011.

The volume of Citigroup calls surged to 231,842 yesterday, the most in almost a year and more than triple the number of options to sell the shares, data compiled by Bloomberg show.

Shannon Bell, a Citigroup spokeswoman, declined to comment on the Goldman Sachs recommendations.

Corbat announced plans last month to cut about 11,000 jobs and pull back from markets including Pakistan, Paraguay and Turkey. The lender will take a $1 billion charge to cover the workforce reduction. Shares have jumped 16 percent since the Dec. 5 announcement.

‘Conviction Buy’

Citigroup replaced JPMorgan Chase & Co. on the Goldman Sachs “conviction buy” list, which includes the firm’s top stock picks. Regions Financial Corp., the Birmingham, Alabama-based lender that’s also on the list, gained 3.6 percent to close at $7.59, the top performer on the KBW Bank Index.

SunTrust Banks Inc., which Goldman Sachs upgraded to buy from neutral, rose 2.8 percent to $29.42. The Atlanta-based lender will benefit from the “continued rebound in Southeast housing,” the analysts wrote.

Goldman Sachs downgraded its recommendations on JPMorgan, which is based in New York, Wells Fargo & Co. and BB&T Corp. While the three banks can still provide “best in class” returns, they have “fewer levers” to increase profits, the analysts wrote.

JPMorgan gained 1.8 percent to close at $45.36. San Francisco-based Wells Fargo and Winston-Salem, North Carolina-based BB&T both advanced less than one percent.

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