Analyst Meredith Whitney Asks Banks "Where's Waldo?"

Reuters is reporting Analyst Whitney Says Citi Has to Cut Dividend More.

Meredith Whitney, Oppenheimer & Co's banking analyst who was the first to say Citigroup Inc. (C) needed to cut its dividend last year, said on Thursday the bank would need to cut payouts again and raise more capital.

Citi has already raised $12.5 billion from foreign funds this year after posting heavy losses last year. It also cut its dividend 41 percent. Citi's shares have lost a third of their value since Whitney's call last year.

Interview With Maria



Click Here To Play Video

I listened to the video a half dozen times and offer this transcript by hand. The following may not be perfect but what's presented below should be extremely close. A few sections were not transcribed. Inquiring minds will want to play it.

Intro:
More Write-Downs Ahead?

The Citigroup research of Meredith Whitney, executive director of CIBC World Markets, triggered a staggering global selloff, and now she's warning that banks could face additional write-downs of up to $70B if bond insurers are downgraded.

Maria:
So you predicted the dividend cut, you've been negative on the banks tell us where we stand in this cycle right now. How much more pain is ahead?

Meredith:
Well a lot of people ask where are we in terms of innings or are we half way over. I think we are probably 40% of the way over. And the biggest problem has been this game of finding Waldo.

No one has been forthright about where their losses are actually hidden, where there exposure is. There's still so much risk remaining on bank balance sheets that has yet to be sold and this constrains lending and that’s why you have a problem with any type of hiring.

Banks aren’t lending so businesses can’t grow, manufactures can’t invest, and this is a systemic issue because banks are still in denial.

If these assets were truly marked to market banks would be indifferent to whether they hold them or sold them. Obviously they are not indifferent. The fact they are holding it means they have some hope that these assets will recover.

If they had sold these assets 6 months ago they probably would have gotten 50-75% more than they can sell these assets for today. When they do finally come up for sale there is going to be a supply jam that will drive these prices even lower.

That is just one part of banks problem. The other part of the problem is loss curves. Loans they have on balance sheets are accelerating in terms of losses and these banks are under reserved for those loans. So capital issues surround these banks all over the place and a couple of banks are at particular risk.

Image Of Whitney's Financial Calls:
Long – American Express (AXP)
Short – Citigroup (C), Merrill Lynch (MER) , UBS

Maria:
Who is most vulnerable for more losses of dividend cuts?

Meredith:
Believe it or not it’s Citigroup. Citi now has earnings problems, they have balance sheet constraints, they have further CDO writedowns, they have exposure to the monolines and they have the single largest concentration of exposure to high LTV [Loan To Value] mortgages.

Citi has over $50 billion in exposure to 90+% LTV mortgages are likely underwater now that housing prices have declined. So they will have the highest severity of losses with respect to those mortgages. I estimate that Citi is anywhere from $6 to $12 billion under reserve because of those exposures. There’s no place to hide for Citi.

Maria:
So you think Citigroup will have to cut the dividend again then?

Meredith:
Yes, Citi is capital constrained and they will be further capital constrained when they have to take more writedowns. ...

Historically payout ratios on dividends is under 50%. As Citigroup becomes earnings challenged, its payout ratio of dividends to earnings is 70% and that is imprudent for a board to authorize such payouts particularly when they are going to sovereign nations and borrowing at expensive rates.

Maria:
Will Citi have to raise more capital?

There is not a doubt in my mind that Citigroup will have to raise more capital. Collectively they raised about $20 Billion from sovereign wealth funds and smaller investors. I believe they raised what they could at the time. ...

Citigroup, Merrill, and UBS raised capital that diluted existing shareholders by 20%. That’s unheard of. And the fact they are going to have to go back and dilute shareholders even further makes my argument of a payout ratio even stronger.

Maria:
The monolines, Ambac (ABK) and MBIA (MBI) what is your prediction there?

Meredith:
There is no way the rating agencies can possibly know how much capital Ambac and MBIA need because no one understands what the end of the housing market decline is actually going to look like. There’s no way they can do it.

Maria:
And as far as things getting worse, how much of this scenario is priced in?

Meredith:
I think that the best case scenario is 15% downside in the financials.
I think that the worst case scenario is 50% downside in the financials.

Maria:
50% downside in the financials, worst case scenario. Meredith, good to have you. Thanks so much.

That was a good interview. But let's discuss bank lending a bit more. Yes, capital impairment is preventing lending. However, lending is not going to revert back to what it was even if the capital issues are solved. Psychology has changed and it's extremely unlikely to change back for a long time. A secular peak in lending craziness has been reached and the pendulum has far, far to go in the other direction.

The process has just started. More writeoffs are coming from commercial real estate and credit cards. Furthermore there is no reason for businesses to hire or expand given rampant over capacity everywhere. This recession is going to be far deeper and last far longer than anyone thinks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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