KBW: A Citigroup Breakup Would Yield 57% Upside

Brian Kleinhanzl of Keefe, Buyette & Woods maintained an Outperform rating on Citigroup Inc C, with a price target of $57.

Return Potential

Although the company has significantly shrunk since the financial crisis, the stock’s valuation continues near the lows, which Kleinhanzl believes is a reflection of investor perception of the stock’s return potential following the multi-year restructuring.

“We believe that Citi could be one of the only U.S. G-SIBs (global systemically important banks) that could successfully split up and this should unlock meaningful shareholder value—50+ percent returns versus the current market capitalization,” the analyst pointed out.

Will A Split Help?

Kleinhanzl believes that the key reason for Citigroup to consider splitting up the company would be to drive quicker return of excess capital to shareholders. In its current structure, the company is likely to use the deferred tax asset to generate excess capital over time.

However, the analyst also noted that it would be difficult to drive any significant return of excess capital, given the current and future regulatory environment Citigroup is likely to face. Therefore, the “clearest path” to returning excess capital after the utilization of the deferred tax asset would be a corporate reorganization.

“The anticipated benefits from restructuring should offer a meaningful return to shareholders (57% return potential), and valuation multiples should improve over time since Citi post-split could return to meaningful growth as well,” the analyst added.