"I still have my 'buy' rating on Citigroup," he said Wednesday on CNBC. "It's been painful recently and this year. I think Citigroup can handle a charge of $7 billion. Having said that, it's twice the number I originally expected. So, it hasn't been easy."
Citigroup and the U.S. Department of Justice are reportedly close to reaching an agreement stemming from a probe into whether the bank defrauded investors of billions of dollars' worth of mortgage securities.
On "Halftime Report," Mayo said the payout would be equal to about $1 per share.
"These are big numbers, but as far as the ultimate hit to Citigroup, they can handle this," he said. "The stock's still very inexpensive after this."
Mayo has a price target of $58 per share.
The analyst also said the $7 billion figure was puzzling, compared to JPMorgan's $13 billion settlement.
"We need to see better transparency," he said. "And I also don't think this is going to prevent the next financial crisis and actually punish the right people. I mean, they should be punishing the ex-CEO Chuck Prince or the people at Countrywide, but now you're punishing a lot of innocent shareholders as opposed to getting to the root of the financial crisis, which, as you know, I've wrote a lot about before it happened."
Ahead of quarterly earnings results, Mayo continued to hold Morgan Stanley as his top bank stock pick, with a "buy" rating and a $40 price target.
"As I've said on your show, Morgan Stanley is my first, second and third favorite selections here," he said. "They have transformed their business model more than any other of the Top 10 banks, and James Gorman—he was criticized early on—but now he's being viewed as someone with a forward vision."
Wells Fargo, which reports earnings on Friday, represented a "microcosm of the industry," Mayo said.
"Revenue growth in the banking industry is the worst it's been in eight decades, and one reason is because the core margin of the banking industry is at the lowest level in five decades," he added. "So, Wells Fargo is not immune to that, but to some degree Wells Fargo is a little more of an optimization story instead of a growth story right now."
Mayo has an "outperform" rating on Wells Fargo with a $55 price target. He does not own the stock.
A "buy" rating is higher than an "outperform" rating at CLSA.
Disclosures: CLSA has received compensation from JPMorgan for non-investment banking services. Mike Mayo or a household member/associate has a financial interest in Citigroup and Morgan Stanley or related securities.
— By CNBC's Bruno J. Navarro