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Morgan Stanley Cuts Citi Earnings Estimate 64%

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Morgan Stanley analyst Betsy Graseck released a note lowering her estimate for Citigroup’s (NYSE: C) 2014 Q2 EPS to $0.40 from $1.10 following the recent press suggesting a $4 billion hard-dollar Dow Jones settlement.

Citi is preparing to pay $7 billion to settle a U.S. Department of Justice investigation into possible investor fraud on its mortgage backed securities. The payment includes a $4 billion hard-dollar settlement (higher than the prior $1.3 billion estimate) and a $3 billion soft dollar to serve as mortgage relief to homeowners or used to repair blighted neighborhoods.

Graseck thinks Citigroup’s settlement will put pressure on Bank of America to announce a settlement soon as well.

Related Link: Another Bank Comments On Multiples Driving Returns

Despite this legal action, Citi still holds an Overweight rating with a price target of $58. Graseck notes that there are both potential downside and upside risks facing Citi in the upcoming year.

Possible downside risks for Citi shares include:

  • Spread compression
  • Flat-to-higher expenses
  • Euro volatility
  • Emerging market slowdown
  • Rising losses in non-core
  • Delayed capital return
  • Inability to utilize the DTA
  • Inability to repurchase shares and inability to achieve 2015 financial targets announced by management in March 2013

Possible upside risks include:

  • Lower card losses than anticipated
  • Faster international growth
  • Market share gains, achieving 2015 financial targets sooner than expected
  • Reserve bleed out of Citi Holdings (non-core)
  • Retaining Citi Holdings Businesses and strategic actions

Citigroup shares are trading flat Wednesday morning.

Posted-In: Betsy Graseck Morgan StanleyAnalyst Color Analyst Ratings


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