Saturday, April 19, 2008

Citigroup Capital Dwindles

Citigroup Inc.'s investors, cheered by a $5.1 billion first-quarter loss that wasn't as big as they feared, now must watch out for asset sales, a dividend cut and an infusion of outside investment as the bank's capital dwindles.

Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

The bank's shares surged 4.5 percent yesterday after it reported $16 billion of asset writedowns during the quarter, less than some analysts expected. The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions.

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, Korea and Kuwait. The infusion helped boost Citigroup's Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year.

The first-quarter loss was second in size in the bank's 196- year history only to the record $9.88 billion reported in the previous period. It wiped out so much capital that Citigroup may have to find outside investors or cut the dividend, Hendler said.

Standard & Poor's said it is reviewing Citigroup's rating for a possible downgrade, noting that earnings may be further depressed by loss reserves on the bank's loan portfolio. [Moody’s put them on negative watch.] Fitch Ratings lowered the company's rating one level to AA- from AA, with a negative outlook. Fitch cited deteriorating earnings in the consumer business and investment bank losses.

The market was giddy Friday, as if the bottom was in. News flash: The bottom is not in. A wave of pay option arms failures, walk aways, commercial real estate writedowns, corporate bankruptcies, and credit card writeoffs is coming. Unemployment is going to soar and an "L" shaped recession is upon us.

Nonetheless, this bounce was not unexpected. Stocks do not move in a straight line. The markets fell for six straight months so it is not unreasonable to expect a 2-3 month counter trend rally. In terms of price, this rally may be nearly over. In terms of time, another few weeks or longer of choppy waters may be in the cards. Source