Update Citigroup (C)
It’s a cynical, totally transparent ploy—but it’s our ploy. If you own the shares as I do, I’m sure you hope it works.
Citigroup (C) has announced that it will engineer a reverse 1 for 10 stock split and then resume payment dividends at a rate of a penny a share.
The two moves will finally get the shares above $10, the cut off level for some institutional investors. That plus the new dividend—some institutional investors can’t buy shares without dividends—will expand the stock’s potential ownership pool. Shares of Citigroup have been stuck at $5 for months.
Not that anyone is going to be fooled by these moves into thinking that shares of Citigroup are anything but the slowly recovering equity of the U.S bank that got the biggest taxpayer bailout. Read more
Buy Citigroup (C)
In the long term, I’m not especially interested in owning Citigroup (C).
I think the bank’s consumer banking business, once it’s strength, has turned into an also ran. Its capital needs forced it to put its Smith Barney brokerage business into a strange joint venture with Morgan Stanley (MS). And what was once the best global name in banking has been seriously tarnished by the financial crisis and the company’s near death experience.
Ah, but in the medium term, it’s a different story. Read more
Just what Citigroup doesn’t need–more questions about its capital
Exactly how well capitalized is Citigroup (C)?
That’s a question that the Financial Times raised on September 7. The answer, the paper reported, depends on not so much on who’s counting the beans, but on who’s deciding what beans count.
At issue is something called deferred tax assets. A deferred tax asset basically is a loss in the past that can be used in the future to offset taxes. And Citigroup, after pretax losses of more than $60 billion in 2008 and 2009, has a lot of deferred tax assets on its books. About $50 billion of them.
Current accounting rules say a bank can count its deferred tax assets as capital (Hey, don’t ask me how losses can be capital, but that’s what the rules say)—if the bank is confident that will earn $99 billion in taxable income in the next two decades.
And that’s the issue.
Citigroup says, No sweat. The bank points out that it had annual pre-tax profits of $20 annually from 2002-2006.
Some accountants, Wall Street analysts, and even the Securities & Exchange Commission (SEC) aren’t so sure. They say projections are fine and dandy but that Citigroup ought to be creating reserves against the possibility that, in the current global financial uncertainty, the bank won’t record the necessary level of profits. The SEC asked the bank to explain its treatment of deferred tax assets last year. And, as is SEC policy, the agency isn’t talking about whether it still has questions or is satisfied.
The question comes at a very awkward time for Citigroup.
The biggest U.S. banks are finally seeing their need to add new reserves to capital against bad loans decline. If bad loans decline enough, banks will go from having to take money out of earnings to put into reserves to taking money out of reserves and adding it to earnings. The switch will have a dramatic effect on bank profits and losses and that effect is being felt right now and should accelerate in the rest of 2010.
Any autumn rally in bank stocks will be based at least partly on this shift in reserves.
I think you can count on that shift adding to assets at big banks such as JPMorgan Chase (JPM) and Bank of America (BAC).
At Citigroup you can probably count on that shift—but it’s not quite as certain as with other big banks. And that makes Citigroup just a little bit more of a gamble.
Citibank has survived but I don’t think the bank has much of a future
“We have turned the corner,” Citigroup CFO John Gerspach, said when he announced Citigroup’s first quarter 2010 financial results on April 19.
But I have to ask, What corner is he looking at?
Can’t be the corner of 40th and Broadway near my office in Manhattan. There a dingy Citigroup branch with beat up ATM machines is barely hanging on in competition with a refurbished JPMorgan Chase (JPM) branch down the block (with ATMs that deposit checks without a deposit slip) and a brand new Capital One (COF) office up the block.
Can’t be the corner of 104th and Broadway near my house where a new Sovereign bank branch is siphoning off accounts from local small businesses that used to be Citigroup customers.
Can’t be the corner of my desk where I’ve got my JPMorgan Chase mortgage bill stacked near my Fidelity credit card bills. I get regular annoying phone calls from Chase asking me if I want to refinance my mortgage. I can’t remember ever getting a mortgage marketing call or letter from Citigroup. And my wife and I once had a Citigroup mortgage and we have an account with the bank.
And this is what’s happening in the bank’s home market and what was once its core business of consumer and commercial banking. If Citigroup has trouble on this turf, you know it’s in trouble everywhere.
The truth is that Citigroup has indeed survived. But that, as hard and desperate as that struggle was, may have been the easy part. (This doesn’t mean Citigroup is out of the woods entirely. It could still get caught up in the kind of legal action the SEC (Securities & Exchange Commission) has filed against Goldman Sachs (GS). For more on what banks might be most at risk see my post http://jubakpicks.com/2010/04/20/an-intelligent-guess-at-whos-at-risk-after-the-sec-charges-goldman-sachs/ )
What’s hard to see is a future in which Citigroup is anything more than an also ran. Read more
Saving the big banks but destroying banking
There have been no obituaries. No eulogies. No burial services.
But this quarter marks the death of traditional bank at the big money center banks.
Oh, I know we’ve seen amazing earnings reports from the likes of Goldman Sachs (GS) and JPMorgan Chase (JPM) this quarter. But their profits came from things like trading.
From everything in fact but what you and I—and certainly the preceding generation—called banking.
And it’s exactly those huge profits from everything but banking that have put the final nail in the big banks as bank.
Goldman Sachs and JPMorgan Chase and maybe Bank of America and Citigroup too will survive as financial institutions. But they won’t be banks.
That’s important because hate them though we may at the moment, banks play an important part in making our economy go. And the withdrawal of the nation’s biggest banks from traditional banking leaves a gaping hole in our economy. Perhaps other banks—smaller national banks and regional banks—can fill that hole. But it’s not certain. (I’ll be taking a look at the regional banks next week.) The absence of the big banks from traditional banking won’t bring the economy crashing down, but it will make the economy less efficient at a time when we need as much economic efficiency as we can get.
The model for what these big financial institutions will be is laid out in the most recently quarterly earnings reports from Goldman Sachs and JPMorgan Chase. Read more
