"We believe bank stocks deserve to trade below tangible book if: 1) balance sheet risk threatens TBV; or 2) it can't earn its cost of capital. We think Citigroup (C +1.1%) will disprove these worries over the next 12 months," writes analyst Erica Najarian. "We believe the pullback in the stock has created an especially compelling entry point for investors."
The bank trades for 0.9x Dec. 31 tangible book value of $55.38, and at 8.4x consensus 2015 earnings - among the cheapest ratios for all U.S. bank stocks, and the only big-cap bank trading at less than tangible book.
At root of this is Citi's exposure to struggling emerging markets - last year 56% of bank revenue and 62% of adjusted net income came from outside of the States. Najarian's team ran brutal scenarios occurring all at once in Mexico, Hong Kong, Korea, and India - and came up with just a 7% hit to EPS, but continued growth in TBV.
There's also increased deployment of excess capital to look forward to - mainly share repurchases - thanks to the continued wind-down of (capital-intensive) Citi Holdings assets and the recapture of the DTA.