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Citi's Lights Are Bright Ahead of Earnings

Richard Saintvilus

NEW YORK ( TheStreet) -- When we last spoke about Citigroup's prospects, the chief concern among investors was with the bank's risk versus its potential reward. Citi was peculiar in a couple of ways.

First, the pace of the bank's recovery presented investors with plenty of reasons for optimism. Yet, it was broadly understood from management's own words that there were no "easy solutions." Management was sending cautionary hints that Citi's underlying value was going to take some time to be realized. It seems, though, I was a bit more confident in management than it was. This time, it is the Street that seems to bright-eyed.

Citi's first-quarter performance (reported in April) was not what I would call exceptional. But relative to expectations it wasn't that bad. I also felt that management showed enough progress for me to then assign a $55 price target on the stock. Almost two months later, shares reached $53.56 on May 30, gaining almost 20%. With second-quarter earnings due out Monday, investors are wondering if it's time to lock in profits.

I still believe that $55 per share is "money in the bank" for Citi, I think we need more realistic expectations with what's likely to be reported on Monday. The Street is looking for $1.17 in earnings per share on revenue of $19.68 billion. This would represent year-over-year EPS growth of 17%, with revenue increasing at almost 6%.

First, it wouldn't surprise me if Citi were to reach and/or beat these targets. But it wouldn't shock me if management missed on revenue, either -- it seems a bit too optimistic, especially when compared to the revenue growth estimates for Wells Fargo , which is expected to decline by 40 basis points.

I don't disagree that Citi's 12% sequential revenue improvement last quarter was a step in the right direction. The overall earnings results still revealed some challenges, though. Management talked about working through "legacy issues," suggesting there are things in Citi's past that are still preventing the bank from fully breaking through.

Along similar lines, I've pointed out recently that Citi's management still faces pressing concerns such as poor loan growth, a market where Citi has been losing share to both Wells Fargo and Bank of America . Let's not also forget that Citi's global reach has come under attack by JPMorgan Chase . Management has been working to repair Citi's global presence, while also trying to stabilize the bank's position in the U.S.

Balancing these objectives is not easy, especially since Citi is highly levered to the global economy. In that regard, attention should be paid to how Citi performs in segments like Global Consumer Banking and transaction services, which disappointed last quarter. The lackluster results led to sluggish net interest income (NII), which was down 1% year over year and down 2% sequentially.

Let's also remember that loans were flat year over year and down 1% sequentially last quarter. This indicated to me that both Wells Fargo and JPMorgan were stealing market share from Citi. This also meant that despite the reasons to rejoice in Citi's strong showing in commercial lending, management is underperforming on the consumer side of the business.

Average retail loans were up only 2% sequentially while card loans were down 1% -- two key areas where Citi needs to focus its attention this quarter. So, how the stock performs on Monday will depend on how well management was able to repair the deficits in consumer lending, among other areas.

I've been bullish on Citi's revival for quite some time now, and I don't see any reasons to change sentiment especially with the housing recovery now in full swing. Although I believe Citi will beat its earnings-per-share estimates due to continued cost cutting and restructuring plans, I would caution about the revenue target. It seems too optimistic given not only the less-than-ideal interest rate environment but also Citi's dependence on Europe, which has yet to fully recover.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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