Meredith Whitney cut her teeth on Citi. For nearly a year now the analyst has had a strong bearish ’sell’ slapped on the banking monolith. A rating which, when initiated, made Whitney’s name go household.
Today is something of a vindication then. Even in the wake of the TARP, this institution is barely viable.
We see C, as a stock trading under $5, as a speculative investment and appropriate for risk-tolerant investors.
On a pro forma basis, including the $25B in TARP capital from the Treasury, C’s Tier 1 ratio as of 9/30/08 would have been ~10.4%. Pro forma, Tier 1 capital, subject to Federal Reserve Board approval, is expected to be approximately 14.8% and its TCE/RWMA ratio would be approximately 9.3%.
[For other TCE/RWMA ratios, see our earlier note.]
Whitney writes that Citi has around $120bn of what she classifies as risky assets, broken down thusly:
In addition to which, some $198bn of credit card loans and receivables (flagged by Whitney earlier as a next domino to topple in the US economic unwind).
All of which adds up to an underperform by the bank: even with billions of government support.
We rate C Underperform. Our estimates are for a loss of $2.87 in 2008 (vs. consensus of a loss of $2.31) and a loss of $2.65 in 2009 (vs. consensus of a gain of $0.76).
Citi stock has nevertheless soared. How could it not. On Monday morning in New York it was up up 46% at $5.55 a share. CDS spreads too have tightened. After a close of around 500bps on Friday, 5yr CDS had tightened to around 250bps.
Fate of Vikram Pandit: unknown. So far it looks as if the US government is standing behind him. With no dividend for three years though, and the disastrous run the bank has had since he took over - whether his fault or not - it surely won’t be long before he’s gone. Felix Salmon at Market Movers notes:
In the medium term, however, Vikram Pandit is surely toast… Of all the CEOs crunched by the present crisis, only Dick Fuld looks worse.
In general, there’s no sense of finality here, of the government stepping in and taking charge of the situation. Instead, Treasury seems to hope that with $20 billion and some loan guarantees it will be able to help Citi muddle through for the time being. I suspect that it might end up disappointed.
Related links:
Citi of over-leveraging - FT Alphaville
Annals of unintended consequences, Citi bailout edition - FT Alphaville
______
