Will Citi Dilute Shareholders Again?

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Citigroup (NYSE: C) shareholders breathed an enormous sigh of relief on Monday, welcoming a second government bailout that didn’t significantly dilute them. They may not be out of the woods yet, though: In a research note published yesterday, UBS (NYSE: UBS) analysts, led by Glenn Schorr, praised the government’s latest efforts, but said they expect the bank will need to do “a sizable common [equity] issuance by early 2010” to bolster its balance sheet.

While the government’s $20 billion preferred-share investment and its loss guarantee provide approximately $40 billion in extra capital, they do little to improve Citi’s tangible common equity, against which any losses are charged first (tangible common equity is a measure of net worth that strips out intangible assets, including goodwill).

$35.5 billion in tangible net worth vs. a $29 billion ceiling on first losses ...
... doesn’t leave Citi with a lot of breathing room. Furthermore, while the government will cover any losses exceeding $29 billion on $306 billion of the bank’s assets, these don’t include the credit card loan portfolio, for example.

As the following table shows, although Citigroup’s new Tier 1 Capital ratio is now gleaming, its common equity-to-total assets ratio remains significantly lower than those of its two closest peers, JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC).

Company	Tier 1 Capital Ratio (Sept. 30, 2008)	Average Common Equity-to-Average Assets Ratio (Sept. 30, 2008)
Citigroup	14.8% (Adjusted for the government’s latest preferred-share investment/loss guarantee)	5.1%
UBS	10.8%	2.1%
JPMorgan Chase (NYSE: JPM)	8.9%	6.9%
Wells Fargo (NYSE: WFC)	8.6%	8.1%
US Bancorp (NYSE: USB)	8.5%	8.4%
SunTrust Banks (NYSE: STI)	8.2%	9.9%
Bank of America (NYSE: BAC)	7.6%	8%

Source: Capital IQ, a division of Standard & Poor’s.

Perhaps UBS analysts would have been more reassured if the U.S. authorities had taken a lesson from their employer. In October, the Swiss government transferred $60 billion in dodgy assets off UBS’s books into a separate investment entity managed by the Swiss central bank -- something the U.S. Treasury stopped just shy of doing. Maybe that’ll be the next step in this rapidly expanding bailout.

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