Earnings and US banks will likely growth by 300 percent to 500 percent from 2011 to 2015, Rochdale Securities Banking Analyst Richard Bove said in a research note, Reuters reported Monday.
Liquidity and capital will be the base for the significant earnings growth, Bove said.
Bank earnings will likely be dismal for the remainder of 2009, he said.
US regional banks will continue to lose money into early 2010, he added.
By Ryan Williams, MarketWatch
NEW YORK (MarketWatch) -- Rochdale Securities analyst Richard Bove initiated coverage on Citigroup Inc. Friday, issuing a buy recommendation on the beleaguered bank, and valued its shares 27% above their current price.
In a report to clients, Bove issued a price target of $4 a share for Citi and estimated its stock to be worth $12 a share when earnings "normalize," he wrote.
The company's shares closed Thursday at $3.13 a share, and rose as much as 8.5% in pre-market trade Friday before pulling-back to $3.16, up 1.3% on the day.
"Citigroup is an unusually controversial company because its loan losses are at a level that suggests that the company would have difficulty surviving without government assistance," wrote Bove.
Because of this, the firm was deemed "too big to fail," according to Bove.
Consequently, "some companies have developed such unique positions that their elimination would cause harm to others," he wrote. "I believe Citigroup is such an organization."
Bove argues that the government will support the firm while it sells or suns off bad assets, and that the resulting firm should be profitable, and, more importantly, worth more to investors than it is now.
To recover, he said, Citi needs to return the company to its core operating strengths, build a new management structure, improve the balance sheet so it can borrow without government help, and shed bad loans from its books.
In order to restructure its business, Citi must fall-back on its core businesses, which include: taking deposits worldwide, diversifying its loan book, act as a facilitator for cross-border fund flows, and continue its global capital market services, wrote Bove.
Moving on, the company needs to strengthen management, according to Bove, so as to "completely wipe out" its destructive corporate culture. "The revolving door continues to be the only management program at Citigroup." he wrote.
To shore-up its balance sheet, according to Bove, Citi needs to continue on its current trajectory. The bank increased its cash position by 90% to $190 billion, reduced its trading book by $243 billion, beefed-up its reserves by $13.5 billion or 73.6%, and removed the special investment vehicles since its near collapse.
"This data suggests that Citigroup's balance sheet is now more liquid and more equity- based than at any time this decade," wrote Bove. When the economy improves, "this liquidity and equity will be put to work in building the bank's earnings."
Bove said the bank's core problem is its loan portfolio. "It is clearly one of the poorest ever written," he wrote. This may be due to the extension of sub-prime loans, the failure to underwrite small and mid-sized loans properly, and the acquisition of a private label credit card business, according to the report.
Normally, a loan loss provision equaling 6% of its outstanding loans, Bove wrote, would drive a bank out of business, but since the government deemed Citi "too big to fail," it was able to avoid this fate and possibly rebound down the line.http://www.blogger.com/post-create.g?blogID=7295935363313254524
"Thus, even though the loan loss problems at the firm are unlikely to dissipate for some time, in fact, they may get worse before they improve, the company will prevail," wrote Bove.