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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 23, 2008 12:01 AM ET
Citigroup CEO Vikram Pandit has aggressively written down assets, slashed his work force, fought to acquire Wachovia, substantially upped his stake in the company he leads and generally made the tough decisions he was brought on to make. But it’s still not enough. One analyst even estimates the bank could use at least $160 billion in additional capital. Early Monday morning, Citi received some of that much-needed capital, and then some. The U.S. Treasury announced that it will invest $20 billion in Citigroup in exchange for preferred stock. What's more, the Treasury and the Federal Deposit Insurance Corp.agreed to provide protection against losses in a pool of about $306-billion worth of loans and securities on Citigroup's balance sheet. The Treasury indicated it and the Federal Reserve are ready to backstop any additional risk in the asset pool through an offer of a non-recourse loan. (For more details on the Citi bailout plan, CLICK HERE.) It remains to be seen if the bailout is sufficient to shore up the sagging Citi. Indeed, the company has been aggressively cutting back costs in recent months to help stem a rising tide of losses. “We have spent the last year ‘getting fit,’ are more streamlined, and are in a strong competitive position,” Mr. Pandit, at the helm of Citi for just under a year, told employees at a “town hall” meeting a week before the U.S. rescue plan was announced. But the embattled CEO also announced about 50,000 more employee layoffs and cost cuts of 20% in 2009. Nevertheless, the stock dropped 6.6% that day. News emerged on Wednesday that Citi would unwind its remaining structured investment vehicles, which have already cost the bank over $3 billion in write-downs this year. Investors responded by sending the shares down to under $7, rendering Citi a smaller firm by market cap than U.S. Bancorp. The following day, Citi’s largest individual shareholder, Prince Alwaleed bin Talal, stepped in, announcing his support of management and raising his stake to 5%. The bank’s stock fell even further, along with many other financial institutions and the broader market. Reportedly, Citi has begun lobbying to get a temporary short-selling ban on financials reinstated. Some investors who saw Citi as a great bargain years ago, only to see it grow cheaper, are frustrated. “It’s such a value trap,” sighed Keith Stribling, a portfolio manager at HighMark Capital Management in Los Angeles, who holds about 850,000 Citi shares in the HighMark Value Momentum fund and in separate accounts. “Citi has always had potential, but there’s just no other way to describe it.” Still, he’s holding on. “I don’t think it’s going to zero,” Mr. Stribling said in the interview, which was conducted before the announcement of the U.S. intervention. A CIti spokesman emphasized in a statement Friday the progress the company has made: “Citi has a very strong capital and liquidity position and a unique global franchise. We are focused on executing our strategy, including targeted expense and legacy asset reductions, and believe the benefits will be seen over time.” The spokesperson also refused to comment on rumors that Citi was considering selling itself, piecemeal or as a whole. Judging from last week’s share price performance, many investors are shooting first and asking questions later. They've clearly been concerned that Citi has too many risky assets on its balance sheet; that it’s too reliant on short-term funding, especially after its bid for Wachovia failed; and crucially, that earnings will be smacked by steep loan losses. Those concerns might fade a bit now that the U.S. has stepped in, however. What's more, Citi in recent months has been aggressively trimming its assets and reducing exposure to riskier holdings. “You have to recognize the progress management has made in reducing a lot of the risk in these various categories,” said Joe Scott, a Citi analyst at Fitch Ratings. He rates Citi’s debt AA- but has it on ‘watch negative.’ Vigorous competition for deposits also has many market players concerned that Citi won’t be able to diversify the sources of its funding on pace with competitors, especially after it lost its bid for Wachovia to Wells Fargo. It’s been widely reported that Citi may be eyeing Chevy Chase, a Maryland thrift. But in a note last week, CreditSights analyst David Hendler dismissed that as a “consolation prize,” with only 300 branches in the D.C. area. “Even with Chevy Chase,” he wrote, “Citi would lack the critical mass of branches and deposit funding compared to larger national competitors such as [Bank of America] and J.P. Morgan Chase.” Another analyst was vocal last week about the importance of so-called core deposits. Overall, the six largest banks (Bank of America, J.P. Morgan, Citi, Wells Fargo, Goldman Sachs and Morgan Stanley), plus AIG and GE Financial, may need about $1 trillion in new capital, since they have relied on non-deposit funding. Their combined ratio of tangible common equity, at 3.4%, is “simply too low,” Friedman Billings Ramsey analyst Paul Miller wrote in a note to clients on Wednesday. Prior to the govenment bailout, Citi had raised $75 billion since Jan. 1 in private and public capital and from the Treasury’s Capital Purchase Program. The Its tier one ratio stood at now 10.4%, against 10.8% for the combined J.P. Morgan and WaMu on the same basis, and about 9.8% for B of A/Merrill and Wells Fargo/Wachovia. With the government's $20 billion equity capital injection, Citi's capital adequacy ratio will jump to over 14%. Mr. Pandit said last week that net charge-offs on consumer loans would be up to $2 billion higher than they were last quarter in the first and second quarters of 2009, based on his expectation for an unemployment rate of between 7% and 9%. The company put aside $24 billion in loan-loss reserves in the third quarter, up about $8 billion since the beginning of the year. Reserves now constitute 3.4% of total loans. “Understanding that we’re only halfway through the fourth quarter, the environment is affecting both asset values and consumer credit,” Mr. Pandit said at the company town hall meeting last week. Consumer credit quality is “the center of their problems,” Mr. Scott at Fitch Ratings said. “And it looks like the losses there are going to continue to increase well into 2009. It’s going to put a lot of pressure on earnings in future quarters. I think they can dig out of this problem, but it’s going to take a lot of time." Uncle Sam may have just bought Citi that time.
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