Richard Pzena Is Bullish On Citigroup Inc
He likes the financials and thinks that there is a lot of room for these stocks to trade higher and the downside is limited.
Pzena said Citigroup has three issues that are depressing its earnings.
- Low interest rates are hurting profitability of Citigroup's deposit gathering franchise. He believes the costs to gather deposits are high for banks and the opportunity to make money on these deposits are non-existing. He added that Citigroup's earnings would get a big boost if interest rates increase and the deposit spreads go back to historical norms.
- Depressed trading volumes are approximately 30 percent to 40 percent below historical norms and that is a problem for investment banking and trading arms of big banks. Citigroup is not an exception and this would have to change for banks to increase its earnings.
- The expenses that banks are incurring are above historical norms and dealing with a regulatory change, pressure and litigation are inflating the expenses.
Without the three obstacles mentioned above, Citigroup would make $8 per share and it is currently earning $4. Pzena believes that owning the stock right now offers a good trade off, because the potential growth in earnings offers a huge upside potential if the obstacles don't go away.
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