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").

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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