Morgan Stanley Expects A Big Year For This Big Bank In 2015

A recent Morgan Stanley report offered some insight into what analysts believe Citigroup Inc C's capital return plan will be in 2015. After an embarrassing rejection of its plan by the Federal Reserve in 2014, the analysis indicates Citigroup could be well-positioned to institute aggressive share buyback and dividend programs next year.

Analysts see four key reasons Citigroup should be free to return money to shareholders in 2015.

1. Elimination of subprime lending business: Citigroup plans to get rid of OneMain, its subprime lending unit. Regardless of whether Citi accomplishes this goal via IPO or an outright sale of the business, analysts estimate it will free up at least $3.2 billion of capital that could potentially be included in Citi’s capital return plan.
2. Better regulatory positioning: Citigroup’s reputation took a hit after its 2014 capital return plan was rejected, and analysts believe the company will not make the same mistake twice. Citi has been closely engaged with regulators in recent months. Analysts see Citi’s recent announcement to exit 12 international positions (in addition to recent exits from troubled Greece and Spain) as partially motivated by the 2014 CCAR rejection.
3. Strong capital ratios: Citi’s Common Tier 1 capital ratio of 10.7 percent outshines both Bank of America Corp’s BAC 9.6 percent and JPMorgan Chase and Co’s JPM 10.1 percent.
4. Earnings growth: Analysts predict that additional expense cuts will boost Citi’s bottom line, and they project these cuts to result in about $5 billion in deferred tax asset utilization.

After a rocky 2014, Morgan Stanley analyst Betsy Graseck sees big things for the bank in 2015. “We expect a 4 cent dividend hike to 5 cents/quarter and $4.4 billion in buybacks in 2015," she said.

Morgan Stanley’s base case price target for Citigroup stock is $63, a more than 15 percent upside from current levels.