Bad News Bullish for Bank Stocks
Bad news is good news so far in the latest bank quarterly earnings announcements, the latest example being Citigroup (NYSE: C). Despite a $5-billion loss and almost $17 billion in write-offs and set-aside provisions, share prices rallied because the negative numbers were not even worse and in the hope that the lion’s share of writedowns are now in the past.
Even so, Citi is still in a heap of trouble. CEO Vikram Pandit’s pledge to cut 20% of the banking giant’s costs will be both difficult and painful. “With one grim quarter behind him he must make good on promises to streamline Citigroup’s operations, control costs and improve risk, management,” The New York Times reports. For example, it could take at least five years for the company’s technology systems to catch up with its competitors.
Citigroup may not be in the intensive care unit,” said Meredith Whitney, a banking analyst at Oppenheimer, “but it is still in the operating room and has a ton of tubes in it.”
Fitch downgraded Citigroup to ‘AA-’ from AA, with a Negative Outlook.
The potential depth of problems across Citi’s U.S. consumer portfolio will likely make a restoration of desirable financial metrics a 2009 event at the earliest.
Moody’s affirmed the bank’s ratings, but lowered its outlook to negative, while Standard & Poor’s placed its ‘AA-/A-1+’ counterparty credit rating on Citigroup Inc. on CreditWatch with negative implications.
The FT’s Lex warns that investors are in danger of underestimating the unpredictability of the slower-moving losses that Citi still has to absorb on its consumer lending business.
A reasonable scenario is that Citi’s biggest losses are behind it, but that its earnings power continues to be sapped by a steady stream of credit hits. That would make it tough to rebuild Citi’s capital position quickly, crimping its growth potential.
News that Royal Bank of Scotland (London: RBS) is on the verge of a $20-billion rights issue leads Lex to ask whether a huge wave of European bank equity raising is likely.
“Assuming RBS’s restored position is a yard-stick for a “sane” balance sheet, then other European lenders, including Barclays and BBVA, would need to raise a total of about $22 billion of equity. Given the European sector has a $2000 billion market capitalisation,that is small beer.”
To match JPMorgan’s, “fortress” balance sheet RBS would have to raise $28 billion, while the European sector would need $75 billion.
Using a blended range of metrics, including traditional non-risk-weighted ratios, and US banks as a benchmark, Citigroup thinks the capital shortfall in Europe could be up to $400bn-$500bn. “Expect more equity raising to come,” Lex concludes.
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April 24th, 2008 at 8:10 pm
[...] remained a hot topic, as poor results at Citi and elsewhere caused a rally in financial stocks because the results weren’t even worse. In normal times the Royal Bank of Scotland’s [...]