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(Adds Bear Stearns' comments, updates share movement)
March 7 (Reuters) - Punk Ziegel recommended investors buy Citigroup Inc (C.N), a day after the bank announced moves to overhaul its U.S. residential mortgage business, and said new rumors in the market suggest that the financial giant's capital strength may be greater than thought.
"There has been a leak/rumor ... that Citigroup's Tier One Capital could be at 8.8 percent of assets at the end of the first quarter," analyst Richard Bove said.
He added that if these rumors are true, Citigroup will not take "mammoth" write-offs in the first quarter and that his earnings estimates would also prove to be too low.
Bove also noted that the stock was now selling below expected revenue for 2010 and well below stated book value.
"This is simply ridiculous. Fear has replaced logic. Buy it," he said. Citigroup's shares have fallen by about three-fifths from their 52-week high on May 23.
Bear Stearns' analyst David Hilder also reiterated his "outperform" rating on Citigroup stock.
Hilder said despite difficult capital market conditions, he continues to expect Citigroup and other banks to benefit from the U.S. Federal Reserve's moves to cut interest rates and reverse the slowdown in economic growth.
"Citi, of course, has a fair amount of house-cleaning and reorganization of its own to accomplish in the next year, and its stock may lag those of other banks, such as JPMorgan Chase & Co (JPM.N) that began putting their current strategy and discipline in place several years ago," Hilder said.
On Thursday, Citigroup said it aims to cut its home loan exposure by $45 billion, reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business.
Citigroup, which suffered a $9.83 billion fourth-quarter loss tied largely to mortgages, had said it also plans to fold its Citi Home Equity and Citi Residential Lending businesses into its existing CitiMortgage Inc unit.
The changes come as Chief Executive Vikram Pandit reviews operations throughout the bank in an attempt to cut costs and boost earnings.
Pandit is putting his new operating program in place and more announcements are likely as he reshapes and strengthens Citigroup's businesses, Bove said.
"What Mr. Pandit is not doing is breaking up Citigroup into a number of large separate businesses. He is committed to developing working relationships or cross selling among the company's existing operations," he said.
"This has always made greater sense to me given the rocky history of monoline companies in the financial services sector," Bove added.
Bove has a price target of $34, while Hilder has a $32 target on Citigroup's stock.
Shares of New-York based Citigroup were trading up nearly 2 percent at $21.58 on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Bernard Orr, Gopakumar Warrier)