Citigroup (C) shares continue to hold onto gains this afternoon, currently up 19 cents, or 5%, at $3.97, after Oppenheimer & Co. analyst Chris Kotowski raised his rating on the stock this morning to “Outperform” form “Perform,” with a 12-month price target of $4.58.
Kotowski’s main contention is that fears of financials re-regulation hitting bank profits are “hopelessly misconstrued,” as he writes in a companion piece today, “A Road Warrior’s Notes on Re-Regulation and Greece.”
Kotowski says that after travelling 14 cities in the U.S. and Europe and seeing 63 funds in the last 10 days, he’s come away with the conviction that improving credit quality at banks will overwhelm concerns about exposure to European contagion and any hits from new financial regulations.
Re-regulation will have a “muted” impact on return on equity for banks, writes Kotowski. “Our view on this subject is neither a fond wish nor a value judgement … it’s mroe a fact like water runs downhill or the angle of incidence equals the angle of deflection,” writes Kotowski.
As with the credit card act passed last year, banks simply adjust rates to maintain ROE, Kotowski avers, something Citi and others can be relied on to do in order to maintain their access to capital, their “primary raw material.”
As for Citi, it is “leveraged to the health of the U.S. consumer,” writes Kotowski, and he notes improving consumer delinquencies in Q1, a trend he expects to continue.
“Credit costs are very likely to normalize, and we think C is attractively priced on this potential alone.”
Also, Kotowski likes the exposure of Citicorp., the so-called Good Bank, within Citi, which has 45% of its business in Asia and Latin America, and 46% of business coming from securities and banking, businesses that “are better positioned for growth than basic regional banking businesses.”
Oh, and the stock is still below its tangible book value of $4.09, writes Kotowski.
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