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Bradley Keoun & Josh Fineman
Citigroup Inc. shareholders aren’t buying Vikram Pandit’s attempt to salvage the bank by splitting it in two. Nor are they buying the stock.
Citigroup shares tumbled to a 16-year low on Jan. 16 after Pandit, the U.S. bank’s 52-year-old chief executive officer, said he would undo a decade of acquisitions by separating the bank into two units, Citicorp and Citi Holdings.
The problem: Nothing — not $45 billion of U.S. government funds, not federal guarantees on $301 billion of debt, not a pledge to dump non-core assets — can stave off the worst financial crisis since the Great Depression. Already crippled by trading losses on mortgage bonds, the bank faces credit-card losses that surged to a record in the fourth quarter.
“The losses from the investment banking businesses wiped out any margin for error that Citi might have had to be able to weather the storm of the U.S. consumer defaulting on his debts,” said James Ellman, president of San Francisco-based money manager Seacliff Capital LLC.
After initially rallying 17 percent yesterday on news of Pandit’s planned reorganization, Citigroup shares fell, closing down almost 9 percent at $3.50. At that level, it’s below the $3.77 it dropped to on Nov. 21, when the bank entered talks with officials from the U.S. Treasury Department and Federal Reserve over a second round of rescue funds.
Citigroup Chief Financial Officer Gary Crittenden said in an interview yesterday that the bank has had “no conversations at all about additional capital from the government.”
Deposits stay steady
Analysts aren’t speculating — as they were in November — that nervous depositors might pull out their savings and erode the money Citigroup uses to fund its operations. Total deposits stood at $774 billion at the end of December, little changed from the end of September, Citigroup said.
The government’s $52 billion of preferred stock in Citigroup provides a cushion for depositors, who would stand to get paid off before the government in an insolvency. Common shareholders, whose interests are junior to the government’s, don’t get the same comfort.
Tangible common equity, a measure of a company’s net worth that excludes “intangible” accounting entries such as goodwill, fell by $3 to $5.40 a share in the fourth quarter, Deutsche Bank analyst Michael Mayo estimated in a report.
“Lowest in Industry”
In dollar terms, there’s $28.9 billion of tangible common equity, or 1.5 percent of total assets, according to Citigroup. The ratio is “perhaps the lowest in the industry,” Mayo wrote.
“Management needs to sell business units fast, in our view, to build capital before another big quarterly loss emerges,” wrote David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.
Relief isn’t in sight. North American credit-card losses, as a percentage of total loans, climbed to 8.04 percent in the fourth quarter from a third-quarter rate of 7.13 percent, the bank said. During the early 1990s recession, the losses peaked at 6.44 percent.
“Given current estimates of rising unemployment into late 2009 or early 2010, we could expect to see the cards” loss rate continue to rise, Crittenden said yesterday on a conference call.
Crittenden said in the interview that the bank’s plan to hive off about $850 billion, or about 45 percent of total assets, won’t immediately add to equity. The main benefit is to “provide strategic clarity and managerial clarity,” Pandit said on the conference call.
Among the businesses being moved into the “non-core category of Citi Holdings are the CitiFinancial consumer-lending business and Primerica Financial Services life-insurance unit. The company’s core businesses, to be grouped under Citicorp, will include branch banking, corporate lending, transaction processing and securities underwriting and handling trades for clients.
Every time Pandit sells a business — such as its German retail banking operations, which were sold in December for a $4 billion gain — he has to forfeit the revenue that goes with it. In the fourth quarter, Citigroup got $582 million of profit from discontinued operations, not including the one-time gains from selling them. The figure dwarfs the $29 million earned by the bank’s only profitable division, global wealth management.
“Splitting Citigroup into two separate subsidiaries doesn’t change Citi’s business model,” said Roy Smith, a former Goldman Sachs Group Inc. partner who’s now a finance professor at New York University’s Stern School of Business. The plan merely “moves the peripheral business into a separate place.”
“Stop the bleeding”
For the U.S. government, Pandit’s mission to save Citigroup carries urgency. The Treasury and Federal Reserve said in a joint statement in November that it had to prop up the bank to “strengthen the financial system and protect U.S. taxpayers and the U.S. economy.” The company also has 323,000 employees, to whom Pandit said yesterday in a memo that the new organization will “enable us to sharpen our focus.”
Another round of government intervention would probably take the form of an American International Group Inc.-style nationalization, NYU’s Smith said. Pandit and board members probably would lose their jobs and the government would try to “stop the bleeding without too much regard for saving the business model or future shareholder value for that matter,” he said.
Citigroup has racked up $28.5 billion of net losses over the past five quarters, or an average of $5.7 billion per quarter. At that rate, the bank’s tangible common equity won’t last long.
“The next six months will determine if there is anything left,” said Smith Asset Management CEO Bill Smith, who has repeatedly called for a breakup.
With the stock at $3.50, there’s little left to lose.
Citigroup loses $8.3 billion, to split in two
Joe Giannone & Dan Wilchins
Citigroup Inc, scrambling to survive losses triggered by the credit crunch, unveiled plans to split in two and shed troubled assets, and reported a quarterly loss of $8.29 billion.
The banking giant also said it expected more departures from its embattled board, which is losing former Treasury Secretary Robert Rubin as a director later this year.
Still, the bank’s shares rose 4 percent in premarket trading, in part because investors hoped the plan to separate its most troubled assets into a new company would help revive the company.
“It’s one of the first steps toward some positive news and the end of this nightmare,” said Michael Holland, founder of Holland & Co in New York, which manages more than $4 billion of investment.
Citigroup, whose shares have plunged 87 percent since the beginning of 2008, said it recorded $28.3 billion of writedowns and credit losses in the 2008 fourth quarter. Losses over the past 15 months total more than $92 billion.
The bank’s fourth-quarter loss was $8.29 billion, or $1.72 per share, compared with a year-earlier loss of $9.8 billion, or $1.99 a share. The most recent results included $3.9 billion of gains from the sale of it German retail bank.
Citigroup, once the champion of the “financial supermarket” model, is splitting into two operating units in what is known as a “good bank/bad bank” strategy. Critics of the bank, who argue it had become too big and complex to manage, have demanded a break-up for some time.
Citigroup’s core commercial, retail and investment banking worldwide — the good bank — will be reorganized as Citicorp and led by Citigroup Chief Executive Vikram Pandit.
The other unit — to be called Citi Holdings — will encompass brokerage, retail asset management, consumer finance and a pool of risky assets. The bank is considering selling off Citi Holdings assets, or letting them mature.
The bank said it was searching for someone to run Citi Holdings.
The break-up plan comes three days after Citigroup announced plans to sell its Smith Barney brokerage business to Morgan Stanley <MS.N>. Initially, Citigroup will own 49 percent of a venture comprising the brokerages of both banks. Morgan is expected to acquire full control after five years.
Citigroup will receive $2.7 billion upfront from Morgan as part of the deal, expected to close in the third quarter.
Citigroup’s fourth-quarter revenue fell 13 percent to $5.6 billion, reflecting weak capital markets. It global credit card business saw revenue decline 27 percent on weakness in North America.
Consumer banking revenue declined 22 percent, driven by a 47 percent drop in investment sales. Its institutional clients group, securities and banking revenue was negative $10.6 billion, mainly due to net losses and writedowns of $7.8 billion.
“Our results continued to be depressed by an unprecedented dislocation in capital markets and a weak economy,” said Pandit.
Citigroup said its Tier 1 capital ratio, a measure of financial strength, stood at 11.8 percent at year-end, well above the level required by regulators.
The bank has sold $45 billion of preferred stock to the Treasury as part of the government’s effort to prevent the collapse of U.S. banks.
Citigroup also disclosed it was reviewing goodwill on its balance sheet to determine if it should record an impairment. Goodwill, the difference between what a company pays for an acquisition and its value, must be written down if a company believes the value of the acquired business will not recover.
Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, said of the quarterly results, “I think people knew it was going to be bad, but I’m surprised it’s this bad.”