By Mike Caggeso
Either way you slice it, Citigroup Inc. (C) is in for a world of pain.
Facing a possible $30 billion capital shortfall, the company may be forced to cut its dividend or sell assets, said banking analysts Meredith A. Whitney and Carla Krawiec of CIBC World Markets, in a report released Wednesday night.
If Citi makes either move it's likely that shareholders would head for the nearest exist sign.
Exodus Already Under Way?
From the looks of the action in Citi's shares yesterday (Thursday), shareholders may already have started for the door: News of a divided cut or big possible asset sale caused Citigroup's shares to decline by about 7% in early morning trading yesterday.
For the day, Citi's shares fell $2.85 each, or 6.89%, to close at $38.51. The shares traded as low as $38.13, establishing a new 52-week low. Citigroup's stock has traded as high as $57 in the last 12 months, meaning the shares are down 32% from that high-water mark.
"Since 2006, Citigroup has made $26 billion in acquisitions, taken over $6 billion in recent charges, and increased its dividend against a backdrop off almost no net income growth," Whitney and Krawiec wrote in their research report, downgrading the company's stock to an "Underperform."
"We believe the stock will be under significant pressure, and could trade in the low $30s," the report also stated.
Citi Currently a Lightning Rod of Controversy
Citigroup posted a 57% drop in third-quarter earnings. Compounding the problem was where those losses came from: Citi's fixed-income business, usually a strong suit for the banking-and-finance concern, was a big part of the earnings decline – and included a loss of $1.3 billion related to problems with mortgage-backed securities.
Trying to regain footing after the credit rout slammed lenders around the world, Citigroup, Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) agreed to start a fund that would enhance the liquidity of the asset-backed commercial paper (ABCP) market, as well as medium-term notes issued by structured investment vehicles (SIVs). The plan has met with substantial controversy, but the goal of the fund would be to pump liquidity back into the commercial paper markets. Unfortunately, other banks haven't warmed up to the idea because they don't trust the assets backing the loans.
A sale of Citigroup assets only legitimizes those fears.
News and Related Story Links:
- New York Times:
Analyst Raises Doubts About Citigroup Dividend
- Money Morning:
O'Neal Finally Out at Merrill Lynch
- Money Morning:
Banks Create Fund to Help to Fight Woeful Credit Market
- Financial News:
Banks Steer Clear of Super-Fund