Citi Attractive Ahead of Stress Test: Deutsche Bank

Shares of Citigroup Inc. (C) were upgraded by Deutsche Bank, which anticipates events like the Federal Reserve’s upcoming stress test and an improving business environment will be among its main drivers. (See also: How Citigroup Makes its Money.)

Deutsche Bank analyst Matt O’Connor upgraded Citi to buy from hold, saying he expects shares to rebound from their recent low levels. The bank’s stock is down 9.4% year to date.  Citi stock is off 17% from its 52-week high in January, which underperformed Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) by 9%, O’Connor said.

Citi’s shares have taken a beating amid controversial incidents like alleged overcharging consumers on interest and misleading student loan borrowers. But, in a positive for shareholders, the bank recently announced a plant to return $20 billion to shareholders, or about 12% of its market cap.

"Given the recent sell off in C shares and low valuation, the buybacks should matter more than they did," Citi analysts said in a note, calling the capital return plan, one of the biggest among big banks.  

The Fed’s Upcoming Stress Test

Citigroup is also benefiting from “positive” developments in its credit card business, thanks to partnerships with major corporations like Costco Wholesale Corp. (COST) and Sears Holdings Corp. (SHLD).

Fed's annual stress tests are mandated by the Dodd-Frank Act to ensure major financial institutions are financially sound, so they do not collapse in the event of a financial crisis. This year’s two-part stress test is scheduled for June 21 and 28.

O’Conner expects the results from Citigroup’s stress test to be positive. The bank is scheduled to release its second-quarter results on July 13.