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Earlier in a report, we concluded that Citigroup (C) was the best positioned bank to gain from the growth in emerging markets, which were and will continue to be a major contributor to earnings. The bank has an unparalleled global presence, combined with a strong capital position. The bank is also focusing on a cost reduction program to self-fund upcoming investments. We believe a decrease in compensation will further enhance earnings in the coming quarters. Therefore, we reiterate our buy rating on the stock.

Most Recent Quarter's Review

The bank reported stronger than expected earnings for the second quarter of the current year. While revenues missed estimates by 90bps, EPS surpassed estimates by 6.7% largely due to the successful cost cutting initiatives of the bank. Overall operating expenses fell by 6% as compared to the same quarter of the previous year. Most of the decrease in expenses occurred in the bank's Citi Holdings business division. Expenses in the division fell by 25% when compared to the same quarter of the previous year. Over the same time period, expenses in the Citicorp division declined by 3% to $10.3 billion. Part of the decline in expenses for the second quarter in this division was associated to lower compensation costs.

Cost Cutting Initiatives

The management has a target to keep core expenses flat at $11.5 billion for each of the coming quarters. The expenses it incurs on compensation have been targeted for some time now. It is evident from the graph given above that even with a decline in revenues for both JPMorgan (JPM) and Citigroup from 2011, compensation levels remained the same. The graph also shows that the difference in the levels of compensation among the two banks is less than the difference between their revenues. These are among the many reasons why shareholders rejected the executive pay plan in April this year. Shareholders have even sued the bank over executive compensation. The $15 million paid to the CEO of Citigroup has especially been under fire. Feeling the pressure, the bank has decided to rethink executive compensations. The bank's cost cutting initiatives led to a 6.2% YoY decline in total expenses.

Previously in March this year, Citigroup was among the four major banks that failed regulatory stress tests. Back then, the bank was reported to lack enough capital to withstand another financial crisis. Late in August, the bank passed the test, and regulators raised no objections to its revised capital plans. For now, the bank did not ask for any increase in dividends or share repurchases, but it can make such requests in the next round of stress testing, which starts January next year.

Analyst Opinions

Out of the 28 analysts covering the stock, 15 have rated Citigroup as a buy, while 4 rate it as a strong buy, with a mean price target of $39.46. With the current stock price being $32.66, the upside comes out to be approximately 21%.

Market Sentiments

The current put to call ratio of 0.71 is lower than four-fifths of all data points in a year, indicating high optimism. The current put call ratio decreased from the mid-August's 0.89.

Valuations

Citigroup trades at a significant discount to its book value, which makes it even more attractive. The stock trades at discount of 48% to its book value as compared to a 32% premium to the book value for Wells Fargo (WFC).

Source: Citi: The Best Positioned Global Bank To Buy