Citi Wants Out -- What About Shareholders?

Bank of America's (NYSE: BAC  ) plan to repay $45 billion in TARP bailout funds, which was completed this week, left Citigroup (NYSE: C  ) in a lurch. Citi now urgently wants to repay the government's $20 billion preferred share investment as quickly as possible; however, unless they can organize the capital raising and finalize other aspects of the transaction in a matter of days, they may have to wait until after they report fourth-quarter earnings. Here's why I think Citi management will be cooling their heels over the holidays instead of toasting their independence.

Citi, You're no Bank of America
According to Bloomberg, B of A had been negotiating with government officials for two months prior to completing its exit from TARP. Citi only stepped its negotiations into high gear on hearing B of A's December 2nd announcement, which took them by surprise. Furthermore, Citi's situation is more complicated than its Charlotte-based rival:

  • The government also owns a 34% equity stake in Citi and insists the exit process from this shareholding must be determined before repayment of TARP funds can proceed.
  • Citi's lending activity is weaker than B of A's.

High capital ratio, low credibility
Despite the fact that Citi has the highest Tier 1 common equity ratio of the top five U.S. commercial banks (see table below), it is a dysfunctional entity, with a history of lending missteps going back at least as far back as predecessor Citicorp's 1980s LDC debt crisis (LDC: least developed countries -- the previous term for "emerging market").

Company

Tier 1 Common Equity Ratio %
(Sept. 30, 2009)

Citigroup

9.1

Bank of America -- Pro forma, adjusted for capital actions

8.5

JPMorgan Chase (NYSE: JPM  )

8.2

US Bancorp (NYSE: USB  )

6.8

PNC Financial Services (NYSE: PNC  )

5.5

Wells Fargo (NYSE: WFC  )

5.2

Source: Bank of America presentation, PNC Financial Services presentation.

There's no rush
On that basis, it seems only right that Citi should be the last to repay its TARP investment; I certainly don't see any reason why the government need share the bank's sense of vital urgency. In fact, hastily authorizing repayment would send a perverse message to the company's management and investors: "Citi's crisis is over. There's nothing to see here; move along, please."

A temporary reprieve for Citi shareholders?
At the end of November, I warned Citigroup shareholders concerning the risk of share dilution from a capital raising. That risk reared its head sooner than even I had anticipated. All the same, I don't think it will be realized on Citi's rushed timetable. If not, that would give existing shareholders some time during which they should carefully consider their position -- all the while keeping in mind that any reprieve in dilution is likely to be only temporary.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On December 10, 2009, at 4:33 PM, ToddWH02 wrote:

    Some good points, but he's not telling the market anything that it didn't know, nor take into account. And with that said I believe his article will be moot by tomorrow, when Citi announces it's plan.

  • Report this Comment On December 10, 2009, at 4:35 PM, ToddWH02 wrote:

    Some good points, but he's not telling the market anything it didn't know, nor take into account. That said, I believe the article will be moot when Citi announces it's plan tomorrow pre-market.

  • Report this Comment On December 10, 2009, at 7:04 PM, WoodyDog1400 wrote:

    Agree, already old news. Standard MTF reporting..

  • Report this Comment On December 11, 2009, at 12:34 AM, TMFAleph1 wrote:

    @WoodyDog1400,

    This is neither "old news", nor "standard MTF reporting". To begin, I don't report -- I leave that reporters. Furthermore, if you believe an early equity offering/ TARP repayment is a sure thing at this stage, I've got a bridge to sell you.

    Alex Dumortier

  • Report this Comment On December 11, 2009, at 12:37 AM, mktcorreo wrote:

    Citi is the opportunity of a lifetime if you have a two year or more horizon. As a matter of fact the more the better. If you are trader you play the movements and lose money doing it. However, if you are not a trader and you are investing for retirement, this stock belongs in most people's retirement account. All the other banks already made move and have very little upside.

  • Report this Comment On December 11, 2009, at 2:21 AM, Clint35 wrote:

    I think C is a terrible company. I wouldn't buy shares no matter how cheap the price. It's only a matter of time before they get themselves into big trouble again and ask for another handout from uncle sam. Yes a lot of other financials have made big upward moves and C hasn't. But that doesn't make it a good investment. Buy some lottery tickets instead.

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