In slowing economy, Citi might beat Goldman

NEW YORK (Reuters) - Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research, Stock Buzz) may be Wall Street's darling now, but if the economy turns south, investors might wish they had invested in Citigroup Inc. (C.N: Quote, Profile, Research, Stock Buzz) instead, an analyst said on Monday.

Goldman shares have won some of the highest valuations in the financial sector as the company has consistently generated high profit through trading, private equity business, and stock and bond underwriting.

But investors may be too exuberant, because it's not clear how Goldman would fare if the economy dramatically slows or a serious disaster occurs, said David Hendler, an analyst at independent research firm CreditSights.

"People on Wall Street don't really understand what Goldman Sachs is doing to make money," Hendler said at the Reuters Investment Banking Summit in New York. "Most investors say, 'we don't know what they do, so we won't even bother to analyze it.'"

If there were a market-shaking event such as a terrorist act or the collapse of a huge hedge fund, one-third of Goldman's quarterly revenue could dissipate, Hendler said, based on his analysis of the company's value-at-risk disclosures.

Citigroup, he said, is better prepared for cyclical downturns, because it generates revenues from a broader array of areas including retail banking, Hendler said.

"They do a lot more than betting on markets," Hendler said.

But investors appear more bullish on Goldman. The company's shares trade at about 2.8 times their book value, while Citigroup's trade at about 2.13.

Goldman has also shown steady earnings growth in recent years, while questions remain about Citigroup's slow revenue growth and rising expenses.

But current valuations may reflect past performance and are no guarantee of future results.

The economy is showing signs of losing some steam -- the producer price index -- excluding food and energy -- in October suffered its biggest fall since 1993, the government said on Tuesday. Meanwhile, a slumping housing sector slowed U.S. economic growth in the third quarter to its weakest pace in more than three years.

"We haven't eliminated business cycles yet," Hendler said.