On Thursday, Goldman Sachs (NYSE:GS) shifted its stance on Citigroup Inc. (NYSE:C), upgrading the bank's stock from Neutral to Buy and raising the price target to $68 from $55. The revision reflects an anticipated 18% upside, based on a projected return on tangible common equity (ROTCE) of approximately 9.5% by 2026, which is about 80 basis points above the consensus expectations.
Goldman Sachs cites several factors for the optimistic outlook on Citi's stock. The bank is expected to achieve a compound annual growth rate (CAGR) of around 4% through 2026. Additionally, the implementation of Citi's business simplification and reorganization strategies is predicted to contribute positively in the near term. The exit from non-core international consumer franchises is also anticipated to free up capital.
The analysis by Goldman Sachs suggests that Citi has the potential to increase revenue while simultaneously reducing expenses. The bank is also believed to have significant capacity for stock buybacks or balance sheet expansion, especially if there are material changes to the Basel 3 Endgame (B3E) rules.
Although there is a noted risk that Citi may not reach its medium-term ROTCE target of 11-12% by 2026, as outlined during the 2022 Investor Day, Goldman Sachs believes that the current market valuation already accounts for the possibility of lower target returns. The firm expects a meaningful improvement in returns for each of Citi's businesses by 2026.
To align with these projections, Goldman Sachs has updated its earnings estimates for Citi for the years 2024, 2025, and 2026, with changes of -2%, +4%, and -1%, respectively. The firm also increased its price-to-earnings (P/E) estimate for 2024 to 12.5 times, leading to the new price target of $68. This adjustment points to an 18% upside potential for Citi's shares.
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