(MENAFN- Khaleej Times)Citigroup shares have more than doubled from 27 when CEO Vikram Pandit was ousted in a boardroom palace coup in November 2012 to almost $60 a share in late July 2015. The second-quarter 2015 EPS of 1.51 easily beat most sell side Wall Street bank analyst estimates. This was the second successive quarter of blowout earnings. Operating leverage in Citi's business model is bullish for investors as revenues rose five per cent while expenses fell one per cent. Year-to-date returns on assets has reached 103 basis points making it highly probable that return on equity will hit 10 per cent. Citigroup has also performed brilliantly in capital markets generating $3.7 billion in revenues thanks to strong foreign exchange debt underwriting syndications equities and derivatives businesses. Investment banking naturally benefited from Wall Street's current merger mania and the pipeline in debt/equities capital markets.
Citigroup could well generate $6 a share in 2016 EPS. America's third-largest bank has finally rerated since 2012 exactly as I predicated in successive columns and now trades just below tangible book value. However EPS in 2015 should be in the 5.50 range and Citigroup therefore trades at 10.6 times current earnings. Citigroup has a beta of 1.83 and is highly vulnerable to a risk aversion spasm on Wall Street a flattening of the Treasury bond yield curve and litigation risk Citigroup is also hugely exposed to emerging markets consumer banking where non-performing loans will rise as central banks defend free-falling currencies with higher interest rates. Citi Holdings assets $360 billion in early 2011 are now below $100 billion. The Fed approved Citi's 2015 capital plan and the board has approved the $7.8 billion common stock buyback plan. For the next six months I would not be surprised to see Citigroup trade in a 52-62 range as long as the world financial markets remain immune from the China-ignited global recession to which I assign a non-trivial probability. If China triggers a global recession all bets are off for Citigroup and every other money centre bank stock listed in New York (or Zurich!). The money laundering probe at Banamex and the Libor rate rigging scandal are also potential swords of Damocles on the stock price. Credit Suisse was the best-performing stock in Europe after Tidjane Thiam hosted his first earnings call at the new CEO of Switzerland's second-largest universal bank. The former CEO of Prudential has reinforced the capital markets' hope that Credit Suisse will scale back its commitment to high risk complex capital intensive structured product and investment banking businesses. The capital markets want Credit Suisse to mimic UBS' capital light recurrent fee-based capital-generative high-return-on-assets business model. I reiterate my view that Credit Suisse would be a value buy at 25 Swiss francs for a 32 franc target. Valuations are compelling at nine times forward earnings and the bank trades at book value at 27 francs. While Credit Suisse's RoE is 9.6 per cent and therefore lower than both Julius Baer and UBS there is clearly potential for a significant valuation rerating. However even if Monsieur Thiam slashed the investment bank (which I doubt he will) the capital that will be released will not be returned to shareholders (the Weber/Ermotti model at UBS) but will need to be accumulated to boost the bank's Basle Tier One ratio. Credit Suisse is also vulnerable to any safe haven panic buying in the Swiss franc as its cost base Switzerland is far too high. Turmoil in the financial markets this autumn would be negative for the "One Bank" three core franchises - private banking asset management and investment banking. The Brunetti Report could also force management to boost capital reduce leverage and pay surcharges to reduce systemic risks to Switzerland. I am also worried about margin compression risk at the Credit Suisse Private Bank. Earnings euphoria has lifted the shares above 28 francs but I would wait for a retest of the 25-franc levels to deploy new money to Credit Suisse.
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