BMO Capital Says It's Closing The Pair Trade On Wells Fargo And Citigroup

With Citigroup Inc C shares up more than 54 percent in the past year, BMO Capital Markets is finally closing out a profitable two-year big bank pair trade by downgrading Citigroup from Outperform to Market Perform and upgrading Wells Fargo & Co WFC from Underperform to Market Perform.

The firm first suggested the Citigroup-Wells Fargo pair trade back in February 2015. At the time, analyst James Fotheringham was convinced Wells Fargo’s premium valuation and Citigroup’s discounted valuation would converge over time. The trade was a home run for BMO. Citi’s shares have surged 36.8 percent since the trade was first suggested, while Wells Fargo shares are down 1.2 percent.

At this point, however, the pair trade thesis has run its course, Fotheringham says (see his track record here).

“Our target valuation gap derived from our respective target price calculations – i.e., that C shares should trade at a 0.5x discount to WFC shares on a two-year-forward P/E basis – is greater than the current 0.4x discount,” Fotheringham wrote on Sunday.

Related Link: Washington News Overrides Q2 Big Bank Earnings Reports

In addition, following the recent round of CCAR test results, BMO doesn’t see any major catalysts on the horizon for Citigroup in the near future. Fotheringham said he sees limited upside for Citigroup even if the company hits all of management’s aggressive earnings targets through 2019.

Instead, BMO suggests Citigroup investors looking to take profits on their trade should rotate into top bank stock pick Morgan Stanley MS and/or second choice Bank of America Corp BAC. Goldman Sachs Group Inc GS is BMO’s least-preferred big bank stock.