Citigroup Inc (C) Can handle $7 billion Mortgage Probe Settlement Says CLSA Analyst Mike Mayo


Citigroup Inc (NYSE:C) had to resolve a US probe into whether it had defrauded billions of dollars’ worth mortgage securities before the financial crisis. In a latest turnaround, Citigroup has accepted to pay $7 billion as mortgage probe settlement. CLSA Analyst, Mike Mayo, talked on CNBC’s Half time report regarding this announcement and his views of its impact on Citigroup stocks.

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Mayo said that he still has Citigroup Inc (NYSE:C) as his buy option. He accepts the fact that past few days has been painful for Citigroup, but he is confident that Citigroup can handle $7 billion charges as mortgage settlement. But he was surprised to see $7 billion as charges, as he was expecting much lesser amount.

He feels that this might impact their book value by $1 per share. He said that this might look like a big number but Citigroup Inc (NYSE:C) can handle this drop since their stock is still inexpensive after the settlement. CLSA currently has a target price of $58 for Citigroup’s stock with a “Buy” rating.

Mayo started talking about the transparency of Federal Reserve regulators in coming up with these big numbers for settlement. He pointed out another instant in which JP Morgan Chase & Co (NYSE:JPM) had to pay $10 billion as mortgage settlement. He feels that these types of high charges would not prevent the next financial crisis. He thinks that these moves actually punish the innocent share-holders instead of punishing the root cause of the problem.

He also talked about impact of $7 billion settlement to dividends, share buy backs provided to Capital share-holders of Citigroup Inc (NYSE:C).

“We call this the big brother banking environment, where regulators, the government more involved in the business of banks than ever before and as you know Citi failed Fed’s stress test earlier this year, so we have to wait to the end of next March for Citi to get approval to buy back shares,” he said.

He said the he is going to hold somebody from Citigroup accountable for this. He agreed to the statement of the company’s CEO, Mike Corbat, in which he said that he will quit or get fired if Citi does not get approval for buy back stocks.

Mayo said that Morgan Stanley (NYSE:MS) will be his first choice for a stock pick. He feels that they have made best transformation of their business model among the top ten banks. He said that James Gorman, CEO of Morgan Stanley, was criticized a lot initially, but now he is viewed by everyone as someone with a forward vision. He feels that Morgan Stanley is getting the benefit now because of the mess that they cleared in the organization initially.

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