By William Patalon III
Money Morning/The Money Map Report
The board of directors of Citigroup Inc. (C) will meet today to look at beleaguered banking giant’s options after its shares hit a 15-year low, and speculation is escalating that it will have to look at a break-up, spin-off or sale of at least part of the bank.
Citi’s shares have plunged 50% this week – including 26.4% yesterday, when they dropped $1.69 each to close at $4.71. It’s the first time since 1994 that the shares closed below $5.
Citigroup, once the biggest U.S. bank with a stock-market value of $274 billion at the end of 2006, dropped yesterday to about $26 billion, slipping to the last spot after Minneapolis-based U.S. Bancorp (USB) in a list of the Top 5 U.S. banks as measured by market value. Neither a plan by Chief Executive Officer Vikram S. Pandit announced this week to cut costs by shedding 52,000 jobs, nor an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal, a longtime Citigroup investor, seemed to allay investor fears that the bank could stop the year-long run of losses that now totals $20 billion.
“Investors right now aren't convinced that we're done seeing dead bodies on the Citigroup balance sheet,” William Fitzpatrick, an equity analyst at Optique Capital Management Inc. in Milwaukee, told Bloomberg News. “That's what the sell-off is, concern over more and more losses over the next couple of quarters.”
Citigroup spokeswoman Christina Pretto declined to comment on the board meeting. She reiterated a statement made by the New York-based company earlier this week that it has "a very strong capital and liquidity position and a unique global franchise." Citigroup shares
were up 88 cents at $5.59 in German trading today, Bloomberg reported.
Including the $25 billion infused as part of the U.S. Treasury Department under the $700 billion Troubled Asset Relief Program (TARP), the company has at least $50 billion of capital in excess of the amount required by regulators to qualify as "well capitalized." Capital is the cushion banks must keep on hand to absorb losses and protect depositors.
Bank stocks all took hits on concerns a global recession may deepen. JPMorgan Chase & Co. (JPM), the biggest U.S. bank, fell 18% to $23.38, while No. 2 Bank of America Corp. (BAC) declined 14% to $11.25 and Wells Fargo & Co. (WFC) fell 7.7% to $22.53. U.S. Bancorp fell 6.4% to $22.12, Bloomberg said.
After yesterday’s market close, Ladenburg Thalmann Financial Services (LTS) analyst Richard X. Bove of sent out a research note reiterating his “Buy” rating for Citi, arguing that the bank has positive net free cash flows, a strong capital base, and a diversified business base. In the end, Bove says, "cash flows are all that matter," and that it would "take a Depression every bit as large and long as the 1930s debacle to shake this company's viability … I would be a buyer of this stock.”
Bove is considered one of the top banking analysts, and has consistently made the correct calls about the crisis. It remains to be seen if he’ll be right this time.
Citi this week agreed to buy back $17.4 billion of assets remaining in a series of funds known as structured investment vehicles, or SIVs, after it previously agreed to guarantee the liabilities in those funds.
In a separate story Wednesday, Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year’s final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.
“The key question is whether management will be able to continue to find buyers for business units, which is necessary to fortify the capital base against further credit losses and write-downs,” Trone, an analyst with Fox-Pitt Kelton Cochrane Caronia Waller, wrote in a research note to clients.
Fox-Pitt boosted its quarterly loss estimate for Citigroup from its prior projection of only 8 cents a share all the way to 79 cents a share. The brokerage then cut its profit estimate for 2009 from its earlier estimate of 69 cents per share all the way down to 28 cents, Reuters reported.
Trone, who rates Citi shares as performing “In Line” with the general market, cut his target price on the shares from $20 to $16. From Tuesday’s closing price of $8.36 a share, even that lower target price would represent a return of 91%.
Worries about Citigroup’s problem assets will continue to weigh down investor confidence, Trone wrote. Thus, while Citi is definitely a “cheap” stock by one key measure, it isn’t necessarily a bargain.
“Citi trades below tangible book, although we believe this is at risk given still-large problem asset exposures,” Trone wrote.
Citi said it’s moving the structured investment vehicle assets into a portfolio of assets held for sale. The transfer allows the SIV funds to fully repay maturing debt obligations. It will be accounted for as a “cashless” transaction, since the funds were essentially already on Citi’s balance sheet. In fact, the assets will be labeled as being “available for sale” basis, meaning changes in their value will affect the company’s balance sheet equity – but not its earnings, Reuters reported.
Back in December, Citigroup agreed to support the SIVs, which at the time held roughly $49 billion of assets. At one point, the bank’s SIVs were actually “off-balance-sheet” entities, holding roughly $100 billion in assets.
A SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher rates of interest. If managed correctly, fund investors can make a profit from the difference.
SIVs proliferated, and were in widespread use by investment banks and other financial institutions. But they ran aground when the credit crisis caused the demand for short-term bonds and commercial paper to evaporate. SIVs saw the value of their holding plummet, forcing institutions such as Citi – which had been operating the funds as off-balance-sheet funds – to prop them up with financial support.
This is the latest move Citigroup – one of the hardest-hit by the worldwide financial crisis – has been forced to make as it struggles to get back into the black. Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs.
On Monday, Citi unveiled plans to cut more than 50,000 jobs in the “near term” and slash expenses by 20% to preserve capital as it faces a global slowdown that’s expected to push well into 2009. The cuts are on top of the 23,000 jobs eliminated so far this year and are part of CEO Pandit’s plans to whittle the bank’s work force down to 300,000. By the time Pandit puts down the corporate-cost-cutting machete, he’ll have lopped off about 20% of the company’s work force.
At its peak at the end of 2007, Citigroup had a work force of 375,000.
Just last week, as Money Morning reported, Citigroup announced the release of 10,000 employees, and said it was boosting interest rates an average of 3% for about one-in-five of its credit card holders.
News and Related Story Links:
Citigroup Board Said to Weigh Options as Stock Drops.
Citigroup’s Worries Mount.
Citigroup says buying back remaining SIV assets.
Citi to write down $3 billion in fourth quarter: Fox-Pitt.
Structured Investment Vehicles (SIVs).
- Yahoo! Finance: .
Money Morning Hot Stocks Feature (Installment VII):
Hot Stocks: Citigroup to Buy Back Billions in SIV Assets, May Face Another Write-Down.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.