Citigroup was leading all of Wall Street sharply lower during early trade on Thursday.
The key catalyst was believed to be Meredith Whitney of CIBC World Markets, who, late on Wednesday, downgraded Citi to market underperform, saying the bank might have to cut its dividend or have a firesale of assets to make good a $30bn capital shortfall.
Whitney also notes the Catch-22 that means selling assets will constrain Citigroup’s ability to increase earnings:
Our thesis is simple. We believe Citi will need to raise over $30 billion in capital as a results of its tangible capital ratios falling to the lowest levels in decades, now standing at almost half their peer group average at just 2.8%.
Based upon our thesis that over the near term C will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios, we believe the stock will be under significant pressure and could trade into the low $30s.
Citi has been undaunted by these issues and even announced yesterday that it would stump up $4.6bn to acquire the remaining 32 per cent of Japanese brokerage Nikko that it does not already own. Whitney worries about Citi’s appetite for these acquisitions:
Since 2006, C 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.
