Citigroup (C) has been on a roll this week, sparked off on Tuesday by CreditSights‘ upgrading of the company’s stock and debt to Overweight. As TheStreet.com reports, CreditSights termed Citi’s stock a “screaming bargain” and declared Citigroup “back from the brink and back in business.”
CreditSights’ comments were followed by a bullish interview of Vikram Pandit in the Financial Times:
… the Citi chief claims to have the formula that could take the company from last year’s $8bn loss to, if you follow his maths, as much as $20bn in earnings from its core business by 2012.
This was followed up by more of the same in Pandit’s speech to a Citi-sponsored investor conference on Thursday. (Transcript available here).
CreditSights also weighed in again after Pandit’s presentation “[O]n a relative value basis, Citigroup is still trading cheaper to peers due to the uncertainty surrounding some of the Citi Holdings’ assets,” TheStreet.com adds.
Still, we are of the view that over the next two years the stock has significant upside if the company is able to stabilize losses and return to a utility-like multiple. - CreditSights
The government’s 27% stake in Citigroup, and the knowledge that it might soon sell some or all of it, remains a damper on the upside for the stock.
Rochdale Securities analyst Dick Bove notes that Citi “is no longer a risk management business; it is no longer an acquisition specialist; and it is no longer a transformational company.”
In an interview with Bloomberg, Bove said Citigroup could double to $8.50 per share.
As MarketWatch notes, Citigroup is pretty much just a bank. “It takes in deposits and lends money. Citi made $11.2 billion in net interest income in 2009. It made $4.29 billion in commissions. Without aggressive bets on derivatives, trading and cheap cash from the government, Citi will need a lot of luck to make $20 billion.”
24/7 Wall Street’s Doug MacIntyre thinks Pandit has only a very small chance of delivering on his forecasts. “Pandit has clearly not learned one of the most important lessons for public company CEOs—under-promise and over-deliver.”
Meanwhile, Moody’s sounds a note of caution in a new report U.S. bank asset quality stabilizes, but the pain isn’t over as does Fitch in its latest quarterly review of the US banking industry (available for complimentary download).
Loan loss provisions remain well above pre-crisis levels and will need to fall considerably more before Citi is able to generate significant operating profits. - Fitch Ratings
Other analyst comments;
Bank of America’s Guy Moszkowski had a buy rating on Mar 4 with a target of $5.10.”Despite mgt guidance for modestly higher US credit costs in 1Q10, we think C will manage to post a small profit, a positive stock catalyst. Key will then be to line up a few profitable quarters, which our forecasts currently anticipate.”
Glenn Schorr of UBS on Mar 2 remained Neutral, with a price target of $3.75.
Barclays Capital’s Jason M. Goldberg on Mar 1 held an Overweight rating with a $5 target.
Matthew Albrecht of Standard and Poor’s in a Jan 19 report had a Hold recommendation with a $4.50 target.
For latest analyst comment on Citigroup, see Alacra Pulse.
Technorati Tags: (c), Citigroup, PulseCheck
Fitch’s rating outlook for the U.S. banking sector remains negative, although many of the factors that put negative pressure on ratings are easing. We are pleased to offer a complimentary download of Fitch’s latest US Banking Quarterly, which includes individual comments on the top 24 banks rated by Fitch.
Fitch’s negative outlook is focused mainly on the regional banks, where a large portion of U.S. Fitch-rated institutions remain with a Negative Outlook or on Negative Watch. Fundamental financial performance for the banking sector will remain generally weak throughout most of 2010, although this will not likely result in broad downgrades. For the larger U.S. banking institutions, the credit outlooks on long-term Issuer Default Ratings (IDRs) remain generally Stable.
There are some notable exceptions to the negative rating outlook among regional banks including U.S. Bancorp (USB), PNC Financial Services (PNC) and New York Community Bank (NYB). These three banks carry stable rating outlooks owing to better than average asset quality and a comparatively healthier financial outlook.
Generally, the regional banks are more susceptible to further downgrades than the larger institutions, given their concentration in traditional lending activities and greater exposure to commercial real estate (CRE) losses. Fitch continues to view CRE risk as a key area of concern for the U.S. banking sector.
Despite some signs of stability, Fitch remains cautious in its outlook for 2010. High levels of losses from consumer-related exposures (particularly mortgages, home equity loans and credit cards) likely will persist well into the current year. In addition, CRE exposure will likely necessitate considerable incremental charges in 2010. On a cumulative basis, CRE losses now stand at $25 billion since the beginning of 2008 for the banks included in Fitch’s latest U.S. Banking Quarterly report. Given their lagging effect, Fitch anticipates that CRE losses will continue to trend higher throughout 2010. These factors will pressure earnings well into the current year and potentially in 2011.
The full 40-page report, U.S. Banking Quarterly 4Q09 has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
Also available from Fitch: 3Q09 Bank Capital Ratios (Premium)
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Noted bank analyst Dick Bove today cut his 2010 earnings estimate for Goldman Sachs, due to expected lower first quarter trading activity. Standard & Poor’s believes securities-related businesses at big banks will continue to perform well in 2010, albeit below the highly robust levels of early 2009. We are pleased to offer a complimentary download of S&P’s Industry Report Card on the topic.
Selected excerpts:
Securities-related businesses’ strong earnings bolstered European and U.S. banks’ overall financial performance in 2009. In certain cases, trading and investment banking results mitigated the effects of credit losses on lending operations. Starting from an exceptionally strong level in first-quarter 2009, securities-related businesses’ aggregate contributions diminished during the year, and were significantly weaker in the fourth quarter than in the prior quarters.
Standard & Poor’s Ratings Services believes these businesses will continue to perform well in 2010–-below the highly robust levels of early 2009, but better than what the fourth quarter might suggest.
However, to varying extents, weak general economic conditions and elevated credit costs continue to weigh on results. Moreover, the fragile recovery and potential regulatory changes pose significant uncertainties. Thus, our outlooks on seven of these 10 companies are negative.
Following the tumultuous fourth-quarter 2008, trading revenues jumped surprisingly in early 2009-–especially for fixed-income trading. Fixed-income trading encompasses a range of different product groups, including currencies, interest rates, credit, commodities, and mortgages; each of which has somewhat distinct dynamics. However, broadly speaking, fixed-income trading markets suddenly became awash in liquidity in early 2009, as clients started returning to the market.
We estimate that overall trading revenues for the 10 companies covered in this report totaled $208 billion in 2009, up just more than 100% compared to $103 billion in 2008, and up 23% from $169 billion in 2007. Trading revenues were $39 billion in fourth-quarter 2009, off 47% from $73 billion in first-quarter 2009.
Investment-banking revenues-–a relatively smaller source of revenues compared to trading–followed a different trend: Advisory and underwriting activity increased during 2009. Capital markets activity recovered across products, industries, and regions, particularly in the fourth quarter. Announced and completed merger and acquisition (M&A) volumes increased significantly. Equity issuance benefited from a high level of IPO activity, and there was a significant rise in high-grade, high-yield, and municipal debt issuance across global markets.
The report includes credit profiles for Bank of America (BAC), Barclays (BARC), BNP Paribas (BNP), Citigroup (C), Credit Suisse (CSGN), Deutsche Bank (DBK), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley and UBS (UBS).
Industry Report Card: Global Banks’ And Brokers’ Securities-Related Businesses Weakened In Fourth-Quarter 2009, But Remained Substantial Contributors has been made available free of charge to Research Recap users for 30 days by special arrangement with Standard & Poor’s, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $750.00)
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Citigroup’s (C) reclassification last week of $75 billion of non-core assets as core assets amounts to little more than window dressing, in Moody’s view, and has no impact on its credit rating.
“In Citi-speak, this change in mind is expressed as a transfer of assets from Citi Holding to Citicorp with Citicorp being a business mix that the company wants to retain.”
All Citigroup is doing is reshuffling merchandise within the same shop window.
So called “core” assets and “non-core” assets are not within different legal entities funded by separate distinct creditors. Instead, they are all funded by the same legal entities, of which the primary ones are: Citibank N.A., Citigroup Inc., and Citigroup Funding Inc., which Citigroup guarantees.
Businesses in the core mix are regional banking predominantly in the U.S., Asia and Mexico, its North American card business (excluding private label), investment banking, and securities servicing. Also included in core activities are deposits, and currently, deposits far exceed “core” loans as well as total loans for the whole company.
Citigroup advertises its core business as its future. One of the results of the reallocation of assets to the core business is incremental spread income to that business mix. These incremental earnings comes at a time when it is saddled by large credit costs taken against its credit card portfolio and after it experienced a sharp decline in investment banking revenue in the fourth quarter. These incremental earnings will be at the cost of reducing income in the non-core segment. The reallocation will increase the balance sheet of the core businesses by approximately 6%.
For details, see CitiCore: A Notional Reshuffling of Assets (Premium)
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As Goldman Sachs (GS) reports record earnings and other big banks announce quarterly results, we are pleased to offer a complimentary download of Plunkett Research’s Profile and Investment and Securities Trend Analysis 2010. In addition to identifying trends for the financial services industry, the 34-page report includes a review of recent developments and an extensive glossary of investment product facts.
Plunkett’s emerging trends to watch for:
- Greatly increased regulatory oversight will restrict investment companies and lenders of all types. Regulatory agencies such as America’s SEC, may get an overhaul. Investment companies, banks and insurance companies will brace for much higher levels of scrutiny.
Unfortunately, the outcome could easily err on the side of too much new oversight enforced by inefficient new bureaucracies.
- An era of much lower risk-taking by traditional lenders has begun that will last for years.
- The creation of higher-risk loans and investments will be taken over to some extent by hedge funds and private equity funds, accelerating a trend that has already been in place for some time, and replacing some of the former roles of commercial banks and investment banks.
- Alternative lending sources will be used to a growing degree by small businesses and some consumers who are unable to get loans elsewhere. For example, peer-to-peer lending companies are growing through enabling lending by and between members of lending clubs, or between friends and family.
- Virgin Money USA, for example, makes it easy for reliable small business owners to set up loans from friends. Prosper.com enables borrowers to apply for three-year, fixed-rate personal loans online by connecting borrowers with individual lenders. On the other end of the spectrum, small businesses that are unable to obtain or renew bank loans will turn to high-cost “factoring,” a method of borrowing against their receivables.
This report has been made available free of charge to Research Recap users for 30 days by special arrangement with Plunkett Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $149.99)
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Standard & Poor’s today updated and corrected some of the results of its first global comparison of banks’ risk-adjusted capital adequacy, first published Nov 23. The affected bans are Allied Irish Banks (to 4.7% from 5.0%) , Bank of America (6.5% from 5.8%) , Danske Bank (6.1% from 5.4%), and UBS (2.4% from 2.2%). S&P said the changes “result from new material information that we have now received. We recalculated the estimated RAC ratio for Rabobank (to 8.3% from 7.8%) due to a computational error. Receipt of new information and a computational error has resulted in a new estimated RAC ratio for BBVA.” (to 6.3% from 5.4% )
S&P also provided additional information about a number of banks: “Our report prompted a lot of interest about the impact of recent capital initiatives by banks on their RAC ratios and, consequently, we are now providing further supplemental information for banks that have announced substantial capital measures since (the cutoff date) of June 30, 2009. These banks are Citigroup, Intesa, Mizuho, Standard Chartered, and UBS.”
S&P said using Tier 1 or leverage ratios for direct comparisons of banks’ relative capital positions can be misleading both at the national and the international levels.
“We found that the average estimated RAC ratio for large international banks was 6.7% as of June 30, 2009, more than three percentage points below their average Tier 1 ratios. As we generate more RAC ratios, the results to date appear to confirm our view that capital is a rating weakness for a majority of banks in our sample.” S&P set a benchmark of 8% as desirable.
The RAC results also illustrate our qualitative opinion that the Tier 1 and leverage ratios are not sufficient to come up with an informed view about individual banks’ capital adequacy.
For details on the RACF, see Methodology And Assumptions: Risk-Adjusted Capital Framework For Financial Institutions (Premium), published April 21, 2009.
“We are, however, also seeing a clear improvement in banks’ risk-adjusted capital positions, compared with the level in 2007. Beyond fulfilling the short-term goals of alleviating market pressure, responding to the uncertain economic environment, and addressing strategic considerations, banks appear to have started to prepare for a future structural increase in regulatory capital requirements as well. Capital raising, conversion of hybrids into common equity, asset disposals, and reduction in risk assets have allowed a number of banks to significantly increase their capital ratios in the past 18 months.”
After the revisions are taken into account, HSBC remained the top-ranked bank as of June 30 with a ratio of 9.2%. Goldman Sachs (8.2%) and Morgan Stanley (8.1%) rounded out the top quintile.
Mizuho Financial Group (2.0%) remained the lowest ranked followed by Citigroup (2.1%) and UBS (2.4%). However, Citigroup’s RAC pro-forma RAC would have increased to 6.1% from 5.9% if its subsequent capital increases were taken into account.
For the full results see S&P Ratio Highlights Disparate Capital Strength Among The World’s Biggest Banks.(Premium)
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CreditSights sees the repayment of TARP funds as “a positive step for the banks allowed to exit the program as well as the U.S. taxpayer.”
“Still in our view, the repayment of TARP funds represents only an interim step in full normalization of operating conditions for banks. There are still several major financial institutions which will remain in the TARP program after this initial round of repayments and the FDIC’s TGLP program is still active for banks which cannot issue on a non-guaranteed basis. We note, as well, that there are ongoing reports that the Administration favors compensation limits across the financial services industry, as well as potential regulatory changes, both of which we feel could potentially have long-term implications for the financial industry depending on the ultimate outcome of these initiatives.”
“The Treasury also noted in its statement that banks which repay their TARP funds have the right to repurchase the warrants which Treasury holds at fair market value.“
We note that the price of the warrants has remained a sticking point with many banks, who feel that they are too costly.
CreditSights provides an analysis of the impact of the potential pricing and impact of repurchasing the warrants in U.S. Banks: Repaying TARP, Off to the Races Again?
Ed Harrison at Credit Writedowns, along with Boston University Professor Mark Williams argue that the repayments will make make banks weaker and could lead to more failures in the longer term.
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Moody’s has weighed in on the results of the stress test for the 19 systemically important banks, which concluded that 10 of the 19 companies need to build larger capital buffers totaling $75 billion.
“The stress test results are generally in line with our Bank Financial Strength Ratings (BFSR) on these firms, our measure of a bank’s stand-alone financial strength (i.e., without government support). Also, given the clear government support that is being offered to these institutions in the event they cannot meet the required capital increases on their own, which is already factored into our ratings, we do not expect to make any changes to our ratings on deposits, senior debt, or senior subordinated debt of these firms in response to these results.”
All else being equal, upgrades could be contemplated in the medium term if the capital buffers being required become a permanent feature of these firms.
“In contrast, and perhaps more importantly, we continue to view the government support of the banks’ most junior creditors as uncertain, especially if government preferred shares were to be converted to common equity. We will review each firm’s capitalization plan and take rating actions on relevant securities if we perceive a risk of a distressed exchange.”
For details, see: U.S. Government Stress Test Results in Line with Moody’s Existing Bank Stand-Alone and Senior Bank Rating.
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Fitch Ratings said it is likely to place “certain bank ratings on Ratings Watch Negative” following the Government’s stress tests.
Fitch said prospects for increased loan losses in the coming quarters are driving its current review of U.S. bank ratings, which it expects to complete in the coming week. “The review includes but is not limited to the 19 banks in the government stress test and will likely result in Fitch placing certain bank ratings on Rating Watch Negative. Fitch may take rating actions sooner on certain banks facing more near-term developments such as weaker results from the U.S. government’s stress tests or the issuance of new debt/hybrid securities to the capital markets.”
‘Fitch’s view on a bank’s need for incremental capital or a remix of its capital base to restore common equity as a more meaningful loss buffer protecting rated obligations will include an updated review of each firm’s relative exposure to deteriorating loan portfolios as well as the published results of the US government stress tests,’ said Jim Moss, Managing Director and co-head of Fitch’s U.S. Financial Institutions Group. ‘The specific steps that individual institutions are expected to take to enhance their capital positions will also be an important consideration.” Such measures may include asset sales/dispositions or further capital issuances.’
Fitch continues to frame its views on the U.S. banking industry in light of the impact of the weakened global marketplace on the ratings of the banks in its coverage universe.
Fitch anticipates that economic weakness will persist to a significant enough degree to warrant assessing the banks’ profit and capital prospects in a scenario where loan losses increase from already elevated levels.
Fitch’s on-going analysis includes a prospective view on a broad range of financial factors, including the assessment of the effect of environmental issues such as government initiatives to provide support to the industry. In particular, Fitch is focused on evaluating the prospects for increased loan losses in the coming quarters. Fitch’s attention is directed towards banks’ common equity levels given the meaningful erosion in recent quarters and bleak prospects for internal capital generation in future quarters. Other factors being considered in the reviews are each company’s recent performance metrics as well as Fitch’s view of future earnings generation, governmental support, and available liquidity.
Fitch’s analysis will continue to pay special attention to the notching between holding company issuer default ratings (IDRs) and the ratings of hybrid capital instruments, particularly preferred stock (see Fitch Sees Elevated Risk of Bank Hybrid Capital Coupon Deferral in 2009. Fitch believes those companies that have greater exposure to deteriorating loan portfolios and have few alternatives to address a capital shortfall over the intermediate-term could choose to defer their hybrid capital instruments or convert it into common stock. The increased potential of that risk could ultimately result in Fitch widening existing notching between hybrid instruments and holding company IDRs beyond the standard levels, which has already occurred for specific obligations of Citigroup, Inc., (NYSE: C), Bank of America Corp., (NYSE: BAC) and State Street Corp., (NYSE: SSC).
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CreditSights says today’s anticipated announcement by the Federal Accounting Standards Board of an easing in mark-to-market accounting rules should benefit US banks, especially large ones, but could also reduce the effectiveness of the PPIP toxic assets plan. The ruling allows banks to value securities using cash flow models rather than market prices when markets are not active
“The FASB rule should be a positive for banks, as it will allow them to employ expected cash flow models to value securities rather than recent prices. We sense this change will be most important for larger banks, such as Citigroup, BofA, Wells Fargo, Goldman Sachs, and Morgan Stanley that tend to have more material exposures to these difficult-to-value securities as a result of their investment banking activities.”
Still, CreditSights “would like to see better disclosure from banks if they use this new standard. We remain concerned that a good portion of the price declines in value for these securities is driven by fundamental deterioration in the expected cash flows as a result of higher credit losses.”
As well, we believe that this change has the potential to limit the effectiveness of the recently announced PPIP program, since it potentially widens the gap between banks’ pricing and the market price.
Ed Yardeni goes a step further saying that the ruling “might make the Treasury’s latest cockamamie toxic asset plan (PPIP) totally irrelevant.” CreditWritedowns provides further commentary here.
For CreditSights’ full analysis see FSB Folds on Fair Value.
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