Morgan Stanley analyst Betsy Graseck released a note lowering her estimate for Citigroup’s 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.
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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.
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