KBW Sees Expected Returns, Estimates For Citi Moving Lower Again, Downgrades To Market Perform

Citigroup Inc C reported better-than-expected 1Q16 results due to one-time gains from the sale of a business during the quarter. Keefe, Bruyette & Woods’ Brian Kleinhanzl downgraded the rating for the company from Outperform to Market Perform, with a price target of $51.

Path To Improved Returns Not Visible Yet

Kleinhanzl believes that potential shareholder value is trapped until a path to improved returns emerges. He added, “We expect Citigroup to produce returns on equity that are well below peer levels and we are hard pressed to find a catalyst at this time that will improve returns meaningfully.”

Related Link: Citi Q1 Earnings Conference Call: Full Transcript

Kleinhanzl termed Citigroup’s 1Q outperformance as a “low quality beat.” The EPS estimates for 2016 and 2017 have been reduced from $4.75 to $4.60 and from $5.60 to $5.45, respectively, to reflect higher tax rate, preferred dividends and higher share count.

The analyst pointed out that although the downside in Citigroup’s shares is limited, any upside is also unlikely until the company’s returns improve significantly. He commented, “We view Citigroup’s current share price as near fair value since we expect the company to produce returns in 2017 that are roughly 73 percent of the company’s cost of capital by our estimate.”