-We think average earning assets will continue to shrink as the company reduces its Holdings portfolio and its loan book shrinks. A higher net interest margin should help net interest income rise in 2010, but a flattening yield curve and lower loan balances will likely reduce net interest income in 2011.We expect an improvement in trading and principal investment revenues will more than compensate for lower card and banking fee income due to new regulations, helping revenues climb about 15% in 2010 before declining in 2011.
-We think a moderation in credit losses will allow C to reduce loan loss provisions significantly in 2010, although chargeoffs will likely remain elevated. Expense discipline should allow for significant pretax margin expansion during the year, and operating costs should settle at near 50% of revenues in 2011.
- Acknowledging limited earnings visibility and regulatory uncertainties, we think the company can achieve EPS of $0.46 in 2010 and $0.47 in 2011.
-C has restructured its business into Citicorp and Citi Holdings, with Citi Holdings carrying mostly non-core and distressed assets. The plan is ultimately to unwind Citi Holdings, which should lead to a more stable revenue stream. Tangible capital levels now seem adequate to us, but credit losses on loans held will likely remain elevated throughout 2010, in our view. The success of C's loan modifications will likely determine whether chargeoffs escalate from current levels.We think that dilution and asset shrinkage will prevent C from regaining the earnings power it once had. Still, with the shares trading at a discount-to-peers valuation, we see rising long-term value in the franchise.
- Risks to our recommendation and target price include a worse-than-expected downturn in global economic conditions, greaterthan- expected credit losses, and an inability to execute C's business plan.
- Our 12-month target price of $5.50 is equal to roughly 1.0X projected book value, below C's historical average and peers, reflecting market uncertainties.
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