One of the reasons Citigroup's (C 0.04%) stock has sold off this year is related to the bank's exposure to Russia, which has been destabilized after the Russian military invaded Ukraine. The U.S. and many other countries have imposed lots of sanctions on Russia that have really hammered its economy.
Earlier this year, Citigroup reported about $10 billion of total exposure in Russia, which is much more than its peers. Since then, management has been working to insulate and reduce this exposure as much as possible. Let's take a look at where things stand.
Reducing overall exposure
On Citigroup's first-quarter earnings call in April, we learned that the bank had reduced its overall exposure from $9.8 billion to $7.8 billion. We also learned that Citigroup had reshuffled that exposure so more of it was in cash and deposits, which rose in the first quarter as Citigroup worked to get other riskier Russian assets such as loans paid down and off its balance sheet.
Deposits and cash equivalents rose to $2.6 billion in Q1, although Citigroup did have to put the cash in Russia's central bank due to capital restrictions in the country. The remaining exposure consisted of $2.3 billion of loans, nearly $1 billion of bonds, and about $1.5 billion of reverse repo assets and third-party cross-border exposure. At the time, Citigroup built $1.9 billion of reserve capital to account for the Russian exposure and said that losses could amount to $2.5 billion to $3 billion in a severely stressed scenario. Fast forward to the end of the second quarter, and here is where the situation with Russia stands.
Image source: Citigroup.
As you can see, Citigroup actually continued to significantly reduce its Russian exposure by more than $3 billion in the second quarter. Unfortunately, Russia's ruble has appreciated, recently touching a seven-year high, which has actually offset the reduction and brought Citigroup's exposure back up to $8.4 billion.
But this exposure continues to get much more favorable. Citigroup's CFO Mark Mason said on the company's earnings call that the bank reduced cash and deposits at the central bank by $1.7 billion and direct Russian exposure by $900 million, and then had another $400 million of reduction related to third-party exposure.
Mason also said that the exposure is now more heavily weighted toward Russian subsidiaries of multi-national corporations headquartered in the U.S. and Europe.
NYSE: C
Key Data Points
Citigroup also actually released reserve capital in the second quarter that it had previously set aside for Russian exposure, although it still has $1.6 billion in reserves slated for Russia. Management estimates that total losses in a severely stressed scenario would amount to around $2 billion, which is also down from Q1.
How worried should shareholders be?
It is always best to think conservatively as an investor, but it does seem like Citigroup's management team has done a good job of bringing down its Russian exposure in terms of the overall amount and the riskiness in the portfolio.
Given the situation, Mason also said that the bank is ultimately planning to exit both its consumer and commercial banking operations in Russia, and is considering portfolio sales.
But even without a sale, Citigroup has $1.6 billion reserved against what the bank has said could be $2 billion of losses in a stressed scenario. Furthermore, at the end of June, Citigroup had more than $18 billion of reserve capital for losses on loans, leases, and unfunded lending commitments. I would keep an eye on the situation, but no longer see the bank's Russian exposure as a huge concern right now.
