In the wake of Citi’s latest writedowns, CIBC - the analysts who precipitated the bank’s share slide with their dividend-cut note last week - have issued another warning: Citi’s maths doesn’t add up.
Citi insists in its statement on Sunday that after the $8-11bn Q4 writedowns it expects to realise, it will not be cutting its dividend and will restore capital adequacy by the second quarter of 2008 - flatly contradicting CIBC’s October 30 predictions. CIBC issued their own note on Monday, and questioned Citi’s figures:
The math on this announcement just doesn’t add up in our opinion. After what we now expect to be a loss for 4Q and a payout of $2.7 billion of its dividend, its capital ratios should only deteriorate materially. Note, we are not even assuming further credit losses or SIV put backs in this calculation.
By our estimates, C’s payout ratio will be in excess of 90% for 2007 and roughly 60% in 2008. Assets sales intended to improve capital ratios would only lower earnings and push the payout ratio to prohibitive levels. This is the Catch 22 we referred to in a prior note, dated October 30, 2007.
We continue to expect more negative headline risk from C. We continue to believe severely low capital ratios will be the main area of focus, and that as C’s price heads towards the low 30s, pressure will be felt across all financial stocks.
We believe that for Citi to re-establish an average tangible capital ratio of over 4.25%, the bank will need to raise over $30 billion in equity. To do that, it could cut its dividend, raise capital, sell assets, or a combination thereof. In any of those scenarios, we believe the earnings and returns would diminish significantly.
To reiterate then: the dividend will be cut.
