Citigroup's turnaround progress wins a thumbs-up from J.P. Morgan

By Manya Saini and Niket Nishant

Dec 12 (Reuters) - Citigroup C.N was upgraded by analysts at J.P. Morgan on Friday, in a vote of confidence from the Wall Street brokerage for the third-largest U.S. lender's years-long turnaround efforts under CEO Jane Fraser.

Fraser has steadily reshaped the bank's business with a clear focus on simplification, stronger risk controls and targeted investments in core franchises.

J.P. Morgan raised Citigroup's rating to "overweight" from "neutral", citing a mix of economic factors and internal fixes that will finally improve the bank's profitability.

Investor optimism has pushed Citi's shares up about 59% this year, outperforming rivals such as JPMorgan Chase JPM.N and Bank of America BAC.N. The stock is the third-best performer in the S&P 500 financials index .SPSY, after Robinhood HOOD.O and Goldman Sachs GS.N.

The stock was last up 1.3% in morning trading.

"Valuation has improved from the lows and improvement in profitability will be the key driver to further upside," J.P. Morgan analysts wrote.

Still, Citi's stock trails rivals in valuation. The stock trades at 11.2 times expected earnings over the next 12 months, compared with 15.04 for JPMorgan and 12.5 for Bank of America, according to data compiled by LSEG.

Meanwhile, the brokerage expects U.S. banks to benefit from a solid economy, strong markets and a favorable regulatory environment in 2026, helping counter some uncertainty stemming from sticky inflation and mixed labor market data.

It also expects the industry-wide consolidation, which picked up pace this year with several big-ticket deals, to continue in the new year.

"This administration is a key opportunity for some banks to do large deals that could position them more quickly for next 5-10 years," the analysts said.

Despite pockets of worries, particularly in private credit, the banking sector appears poised to enter 2026 on firmer footing, the brokerage said.