Citigroup(C_) and Bank of America(BAC_) have both been pummelled equally in the stock market in the past month, but analysts say Citigroup is the better opportunity.Last week, UBS analyst William Tanona said the stock of Citigroup deserved a premium over Bank of America as it faces “less dramatic uncertainties” from large, mortgage-related liabilities and stronger earnings power.
On Wednesday, Glenn Schorr at Nomura released a report, making similar arguments. While the analyst thinks the selloff in both the stocks are overdone, he still prefers Citigroup and JPMorgan Chase(JPM_) over Bank of America. “..given similar valuations, we think Citi is the more attractive opportunity, based on its edge in capital, reserves, exposure to the growth markets and smaller mortgage-related risks. We also see attractive value in JPM at 1.0x tangible book.”
Schorr lists four reasons why Citigroup is not Bank of America.
- First, Citi is better capitalised. The analyst estimates that Citi’s Basel III Tier 1 Common Ratio at the end of the second quarter was at 6.7% versus 5.1% for Bank of America.
- Citi also has less mortgage-related tail risk. “Citi’s mortgage servicing portfolio is about one-quarter the size of Bank of America’s, so the headaches surrounding servicing issues are a much smaller thorn in Citi’s side. In addition, the two banks’ rep and warranty risks are meaningfully different, with Bank of America’s outstanding repurchase claims totaling about 11x the amount of Citi’s claims pipeline.” He also notes that Citi will likely pay less in any State AG foreclosure settlement, given its lower mortgage exposure.
- Three, Citi has a lower consumer banking presence in the U.S. relative to Bank of America and would be less affected by regulations affecting consumer banking such as new overdraft rules and the Durbin Amendment that restricts fees charged by banks to merchants for debit card transactions.
- Finally, Citi has greater exposure to faster-growing emerging markets, with 60% of net revenue coming from outside the U.S., compared to 20% in the case of Bank of America. But its exposure to the troubled European nations is not any more than Bank of America.