According to the firm, Citigroup’s earnings power is recovering with an improvement in its asset quality. The company’s international business momentum is also impressive. Citigroup’s long-term strategy to shrink non-core assets and increase its fee-based business mix would also improve the valuation over time. Yet, the shrinking of Citi Holdings portfolio cuts into its earnings power, thereby partially restricting the upside potential of the stock. As a result of continued credit leverage and momentum from asset growth in Citicorp as well as growth in tangible book value, Citigroup shares are viewed favourably by these firms. However, given expected margin pressure and expectations for lower trading results, the firm anticipates headwinds for Citi’s earnings over the next few quarters. Although Citigroup does not have material exposure to the mortgage mess, it does share the lack of momentum in the traditional banking segments, which is key to a breakout to the upside. Moreover, because of the requirement to build capital for Basel III and continued drag on earnings from Citi Holdings, the firm believes Citigroup’s return on tangible capital is likely to lag its cost of equity over the next few years. As a result, the firm has Neutral or equivalent rating on the stock. Moreover, capital deployment to shareholders is likely to be a 2012 event.