Citi shares could, finally, see solid demand

Men travel on an escalator near a Citibank signboard in Tokyo in this June 26, 2009 file photo.

NEW YORK (Reuters) - Citigroup Inc is slowly regaining favor among institutional investors, a development that could help the U.S. government unload its 34 percent stake in the still-troubled bank.

A series of bailouts has put taxpayers on the hook for tens of billions of dollars of potential losses, but left Citigroup with some of the strongest capital ratios in banking.

Citigroup may also have suffered many of the steepest losses it faced in its consumer loan and lease portfolio. The government is covering some potential losses on the bank's most toxic assets, and Citigroup shares trade at a lower valuation than many of its competitors.

That seems to be translating to investor demand. Citigroup shares have more than quadrupled since early March, closing Tuesday at $4.12.

Even hedge fund manager John Paulson, who famously shorted banks and brokers going into the financial crisis, has been buying the bank's shares, a source familiar with the matter said.

Three other fund managers who long shunned the stock said they may start buying. They requested anonymity because they do not want to disclose investment positions they have not taken.

"If you've got a one-to-two year time horizon, the stock could trade into the teens," said Marshall Front, chairman of Front Barnett Associates in Chicago, who also bought Citigroup stock recently. "The possible reward looks good compared to the risk."

In the near term, there are risks.

The bank has been profitable in each of the last two quarters because of one-time gains and accounting items, but has not posted a quarterly profit from its main operations since 2007.

There is also the risk of the government selling a large number of shares into the market. Concerns about such a sale drove Citi shares down 8.85 percent on Tuesday.

LOW INSTITUTIONAL OWNERSHIP

Sources told Reuters the bank is talking to the government about how the U.S. should shed its 7.7 billion Citi shares.

The bank may sell another $5 billion of shares to raise funds to start buying back about $27 billion of other Citi securities that the government owns, the sources said. Those securities, known as trust preferreds, are a hybrid of stocks and bonds. These sources requested anonymity because the talks are private.

But demand for Citi shares may be larger than naysayers fear.

The government's holdings are not outrageously large compared to the nearly 1 billion Citi shares that have traded daily on average over the last month, according to a report from Sandler O'Neill & Partners LP.

If trading volume remains at those levels, the government could sell a small portion of its holdings daily over the next year and have little impact on the bank's share price.

And institutional investors hold only 9.5 percent of the bank's outstanding shares, compared with 73 percent for typical peers, the Sandler O'Neill report said. That means institutional investors are underinvested in Citigroup now, and could look to boost their holdings over time.

Switzerland found extensive demand for its 9 percent stake in UBS AG last month when it sold $5.1 billion of the bank's shares. Orders for the shares far exceeded stock on offer, the finance ministry said.

UBS shares have risen about 12 percent since that sale, which investors saw as a sign of the bank's strength.

Citigroup shares trades at below their tangible book value. In contrast, JPMorgan Chase & Co shares trade at about 1.8 times their tangible book value.

Front said Citigroup shares could rise as profitability improves. "It has a very, very, very low valuation," he said.

(Additional reporting by Svea Herbst-Bayliss in Boston)

(Reporting by Dan Wilchins; Editing by Phil Berlowitz)