As Citi struggles to break free from the grip of its writedowns, and with capital levels hovering dangerously low, a takeover by a smaller banking rival is a distinct possibility, warn CreditSights.
In a gutsy - and perhaps mercurial - call, analysts at CreditSights say a takeover from JPMorgan isn’t unlikely, given the outlook for Citi. Otherwise, there’s also the threat of a breakup. At the very least, it’s a sluggish, troubled end to the decade for the world’s biggest bank - with the dividend remaining under threat for years to come.
It will take Citi three years to recoup losses on CDO writedowns, according to the report, and problems may get much, much worse.
First and foremost, Citi is faced with further big capital hits from its seven ailing SIVs, between them with $66bn AUM. CreditSights think this will be the next test of strength for the bank. The M-LEC superfund-cum-stumbling block, then, is far more critical for Citi than previously given credit.
Secondly, CreditSights hint at further CDO writedowns in the offing. Indeed, with a definite sense that the super-senior CDO debt market is fast collapsing, Citi can expect more trouble. The bank has $45bn in super-senior CDO exposure.
All in all, it amounts to a serious - potentially crippling - lead weight strung around Citi’s neck.
Our back of the envelope break-up valuation using a proxy of comparable companies P/E ratios applied to Citi’s major business units shows a potential 18-30 per cent upside from splitting up the company. In addition, our merger math indicates that a deal with JP Morgan Chase could be accretive when considering substantial potential cost saves. Unlike a deal with Bank of America, which would exceed the national deposit ceiling of 10 per cent, a JPMorgan Chase-Citi combination seems more doable, especially considering that much of JP Morgan’s senior leadership including CEO Dimon have extensive backgrounds at Citi. Further, Dimon has demonstrated a strong ability to integrate large bank deals, most recently being the JP Morgan-Bank One merger.
The Citi board meets on Monday and Tuesday to discuss the appointment of a new CEO.
