On May 31, 2013, we downgraded our long-term recommendation on Citigroup Inc. (C) to Neutral from Outperform based on the company’s elevated operating expenses, despite the ongoing efficiency saving initiatives.
Why the Downgrade?
Operating expenses at Citigroup were up 1% year over year to $12.4 billion during first-quarter 2013. Increase in expenses reflected higher repositioning charges, partially offset by decreased legal and related costs and efficiency savings.
Rising operating expenses remain a major concern for Citigroup. Moreover, the company continues to encounter many investigations and lawsuits from the investors and regulators. Though the company resolved certain litigations related to the sale of risky mortgage backed securities, many of the cases are yet to be resolved. All these factors are expected to lead to increased expenses and litigation provisions in the near term.
Further, although Citigroup’s underlying franchises of the consumer businesses have remained strong, revenues have continuously been under pressure for the past several quarters. Considering the protracted economic recovery and the low interest-rate environment, any substantial growth in the top line is expected to remain limited in the upcoming quarters.
However, following the release of the first-quarter results, the Zacks Consensus Estimate for 2013 has gone up 1.3% to $4.73 per share, over the last 60 days. The Zacks Consensus Estimate for 2014 has also increased by 1.5% to $5.49 per share over the same time frame. With the Zacks Consensus Estimates for both 2013 and 2014 going up, the company now has a Zacks Rank #3 (Hold).
Other Major Banks to Consider
Some major regional banks that are worth considering include The PNC Financial Services Group, Inc. (PNC), JPMorgan Chase & Co. (JPM) and Comerica Incorporated (CMA). All the 3 banks hold a Zacks Rank #2 (Buy).
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