Notable Calls

Goldman Sachs adds Citigroup (NYSE:C) to their Conviction Buy list today with a $5.50 price target (prev. $4.60) as:

1) the current valuation discounts a significantly lower ROA/ROE than the 120 bp/16% they estimate post the run-off of Citi Holdings;

For Citigroup Goldman expects steady-state earnings of about US$20 bn (equivalent to about $0.70 per share) based on 117 bp ROA and ‘core’ assets of US$1.7 trillion. Given their base case for a 3-4 year projected run-off of Citi Holdings, the firm believes that Citicorp can potentially reach this level by 2014 and along the way asset run-off in Citi Holdings should continue to generate significant capital.

2) its private label MBS exposure is small relative to peers, limiting put-back risk;

3) disposal of the 10% government stake should be completed by early in 2Q11, eliminating the stock overhang;


On the former issue, the government is currently working on its fourth selling program (1.5 bn shares), and once this is complete we anticipate just over 2 bn shares remaining heading into 2011. To put the 2 bn shares into perspective, that is less than 4 days of average daily trading volume for Citigroup, or said otherwise, only 45 trading days would be needed to sell the remaining stake assuming shares are sold at 8% of average daily volume.

4) Goldman estimates C's core earnings power ($20 bn pa) and excess capital from the run-off of Citi Holdings supports their $5.50 12-m price target (35% upside).

Notablecalls: I'm somewhat surprised to see Citi added to the List at Goldman, so I think it sees some buying interest into $4.30.