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Why Citigroup Is No JPMorgan

I've been bullish on banks all year and in particular, I have become somewhat enamored with the turnaround story that has become Bank of America (BAC). However, I have no shame in admitting that the $2 billion derivatives loss announced last week by JPMorgan (JPM) has become a significant test on my resolve to the extent that I have started to look within the entire sector more closely.

What I have found is that not only are each of the banks different, but the complex nature of how they make money, while it may pose a risk to one is often entirely void of risk for the next. But be that as it may, Wall Street has an uncanny way of trashing apples that are grouped within the same basket -- whether they are rotten or not. But this is where astute investors can often find some gems, such as another turnaround story in global money center bank Citigroup (C).

The magnitude of a $2 billion loss cannot be ignored -- regardless of relation to assets and future earnings. Since the news last Thursday, the entire sector has been down almost 4% to 11.3% YTD -- down from last week's net of 15%. Even more glaring is the fact that at the end of Q1, the sector enjoyed a positive YTD gain of 21.5%.

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Though financials have led the market charge for most of the year, the sector is now under extreme scrutiny and has since been punished mercilessly by investors looking for both shelter and peace of mind. I have begun to realize that one possible way to acquire both while also earning a considerable amount of value is to buy Citigroup -- a name that recently reported excellent profits that topped analysts' expectations. I am not ready to proclaim that the bank is back from the doldrums of the credit crisis, however, its fundamentals as well as its portfolio of assets suggest that Wall Street has applied a considerable discount to its current value.

Group Hugs for the Quarter

For its first quarter, Citi reported net income of $1.11 per share -- representing an increase of 7% for the same period of a year ago on revenues of $20.2 billion. It topped analysts' estimates both on the top and bottom lines, and even more impressive was the fact that it beat its net income number by 11%. Additionally, it posted revenues of $18 billion from its core business -- this includes adjustment for various segments such as consumer banking and credit valuation as well as transaction services. This tells me that the bank is performing as well as anyone can realistically expect -- except at this point it does not appear that Wall Street particularly cares.

If one looks at the numbers closely, there is evidence that Citi has shown an increase (albeit a modest one) in its return on equity of 6.5% suggesting a quarter-end book value of around $62 per share. Even more impressive is the fact that its tangible book value, excluding items such as other intangible assets from book value and goodwill presents a per share price of $50.

So as the stock trades today at under $30 with a P/E of seven, one can make the argument that there might not be a better bargain than Citi within all of the financials as its fundamentals suggest that there may yet be close to 70% upside over the course of the next 12 months.

As the company moves forward, it goes without saying that how its stock trade will be heavily predicated on how it executes. So far it has shown to be doing pretty well with making decisions. Full-year revenue expectations are currently at $80 billion while earnings are expected to arrive at $4.21 per share -- not tremendous growth but enough to appease current doubters.

In the meantime, it will have to deal with headwinds created by the unfortunate timing of JPMorgan's announcement -- which quickly reminded investors of the sensitive 2008 period of Bear Sterns and Lehman Brothers.

Bottom Line

There is plenty to like with Citi at this point, but as with other banks, it is not entirely void of risk; the difference is in assessing its risk in relation of its reward. For that matter, the stock is trading at a level that it extremely attractive when compared to its peers. Even more remarkable is the fact that even on the most conservative assumptions, there is (at least) 25% near-term upside potential from current levels to put it at $35 -- still shy of the $38 YTD high reached in mid March.

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