Anticipating the Citigroup Reverse Stock Split, Trading Implications are Major and Many (C, AIG, NYX, BAC, WFC, JPM, RF, KEY, BPOP, IRE, AIB, NBG)

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Citigroup, Inc. (NYSE: C) is about to get a huge stock makeover.  This is its last week as a stock in the single-dollar digits.  At least that is what the world hopes.  Its 1 for 10 reverse stock split is set to take effect and shares today are up 1.2% at $4.53.  We want to examine the impact of this ad see if there are other implications.

For starters, Morgan Stanley raised the rating to Overweight this morning and assigned a price target objective of $6.00 per share.  After today, consider that a $60.00 price target.  Earlier this week came a report from UBS with a “Buy” rating and $5.60 target. As far as how this compares to consensus, Thomson Reuters has a mean objective price target of $5.64 for the stock.

As we also noted at earnings, Citigroup listed a book value per share of $5.85 per share and a tangible book value per share of $4.69.  The hope is that with it restructuring and with it having real earnings again that perhaps the current prices will tend to act as a floor since it is under book value.  The wrench that can break that machine’s thought is that Citi is still trying to shrink itself down to a Core-Citi and that means more asset sales or divestitures.

Reverse stock splits are not always bad.  American International Group, Inc. (NYSE: AIG) is currently above $31.00 and its pre-split shares before its 1-for-20 reverse split were trading at an equivalent price of $19.44.  Those shares did tank in the days after that as they were cut in half, but then recovered handily and it took about a month for shares to get back to the pre-split price.  Within another month of that, AIG’s stock had doubled.

The biggest loser here in the Citigroup reverse-split will be the NYSE Euronext, Inc. (NYSE: NYX) as Citigroup trades an average of over 400 MILLION shares a day.  That is often one-tenth or more of the NYSE’s total share volume.  Ouch.

There is a flip-side to consider here.  This could be a boom for a few other stocks.  Traders will likely look for other lower-priced bank stocks.  Many others like Wells Fargo & Co. (NYSE: WFC) and J.P. Morgan Chase & Co. (NYSE: JPM) already trade at much higher prices.  They are also far healthier. 

It is possible that this will bring even more trading into Bank of America Corporation (NYSE: BAC) as it has a lower price of $12.32.  It also trades under book value, and that has not really boosted shares as investors and traders are worried that billions more in charges could come from the mortgage mess via foreclosure woes and putback concerns.

We do not expect to see exponential volume gains in smaller low-priced active bank stocks, but it would be easy to expect that traders and speculators will play the lower priced banks when there is big news that impacts the financial stocks.  We think a few of these could become the new go-to Citibank-alternative stocks.

Regions Financial Corporation (NYSE: RF) could be one of those with shares around $7.10 and a market cap of close to $9 billion. Its 52-week trading range is $5.12 to $8.96 and the average daily volume is about 13 million shares.

KeyCorp (NYSE: KEY) is another as the parent of KeyBank. Its shares are close to $8.53, its 52-week range is $7.13 to $9.77, its market cap is $8 billion, and its average volume is close to 15 million shares. 

Popular, Inc. (NASDAQ: BPOP) is close to $3.06 and a market cap of $4.2 billion.  Its 52-week trading range is $2.37 to $3.73. The average volume is about 9 million shares per day.

There are also the two crazy Irish banking stocks.  The Bank of Ireland (NYSE: IRE) is close to $1.90 and the 52-week range is $1.38 to $9.00 and average volume is about 4 million shares. Allied Irish Banks plc (NYSE: AIB) has already seen a reverse split of its own.  Its shares are around $3.18 and the adjusted 52-week range is $2.00 to $18.65 with an average daily volume of 1.6 million shares. 

Another bank from the lands of the PIIGS could be National Bank of Greece SA (NYSE: NBG).  Its ADRs trade only at $1.41, its 52-week range is $1.35 to $3.23, and the average volume is closer to 6 million shares a day. 

Citigroup is about to look a lot different starting next week.  Some of these low-priced bank shares may see a rise in share volume when financial news hits, but some likely will not.  Stay tuned.

JON C. OGG