Goldman Sachs have really got it in for Citi. Well, they seem to have it in for just about all their Wall Street rivals. But Citigroup was singled out by Goldman’s William Tanona for a particular kicking on Thursday.
From a note to clients, entitled “Lowering Brokers to Neutral; adding C to Conviction Sell List”:
Citigroup faces multiple headwinds in both its retail banking and investment banking businesses over the next couple of quarters. We estimate the firm will take an additional $8.9 bn in net write-downs during 2Q, comprised mainly of CDOs and associated hedges with the monolines ($7.1 bn), along with a number of other asset classes ($1.2 bn), and a mark-to-market of their own structured note liabilities ($0.6 bn). After raising $12.5 bn in common and preferred equity during the second quarter, we estimate the firm will exit the quarter with a capital cushion of $10.2 bn. Nearly 75% of this cushion is required in annual dividend expense to common and preferred holders. Pro forma for the capital raises during 2Q, Citi would have had exited 1Q with a Tier 1 ratio of 8.7%. We estimate it will exit 2Q at 8.3%.
Repeat: fresh slew of write-downs about to hit; capital cushion shrinks to $2.3bn after dividend payments to common and preferred holders.
The most recent capital raise marks Citigroup’s fourth in the midst of the credit crisis, for a total of nearly $39bn in common and preferred equity. The dividend has only been cut once (producing an additional $4.4 bn of capital annually), and currently yields about 7%. Given the firm’s current level of earnings power, we do not believe the dividend is safe. By cutting the dividend in half, we estimate the firm could produce an additional $3.5 bn in capital annually. Further, Citi has likely reached its limit with the regulators with respect to preferred and convertible issuance. Therefore, we believe any additional capital raises will be in the form of common equity, dividend cuts and/or additional asset sales.
Repeat: dividend cut likely, since further capital raisings would otherwise have to come in the form of regular equity (rather than prefs or convertibles) and/or asset sales.
Here are Goldman’s estimates for Q2 write-downs, comparing Citi with Merrill Lynch and JPMorgan:
