Sterne Agee & Leach Analyst Todd Hagerman recently downgraded Citigroup Inc (C) to “neutral.” He says Citigroup will struggle this year on the risk management front, and he believes the shares are range-bound in the mid-to-high $40s.
“Expectations were pretty high going into the Federal Reserve’s annual capital review program in which Citigroup had been quite conservative as it relates to distributing capital to shareholders to this point. So expectations were high that with the capital levels of Citigroup ranking among the highest in the industry that the capital return would increase pretty materially going into 2014 and the first quarter of 2015,” Hagerman said. “Unfortunately, the Fed failed them on the qualitative factors of their capital planning, so the planned capital return of roughly $6.5 billion didn’t quite come to pass.”
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Additionally, Hagerman says a $400 million fraud was discovered at Citigroup’s Mexico unit, and the Department of Justice and the New York U.S. Attorney General have opened investigations on the company. As a result of the risks Citigroup is facing, Hagerman doesn’t recommend buying the stock. But, he also isn’t advising investors to sell.
“But by the same token, when people ask why not a ‘sell,’ again, I think there is a lot discounted in the stock today in terms of very modest earnings expectations for the company as well as certain of the regulatory risk, so there is a lot discounted already,” Hagerman says. “By the same token, there are different schools of thought in terms of the size of the regulatory risk, the duration, and what it’s going to take to resolve or address some of these issues. And in my opinion, it’s going to take much longer relative to expectations.”
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