Citigroup, RBS, Barclays, others, Short of Capital

In spite of all the "bottom is in" cheering in recent weeks, Shareholders' Relief May Not Last as Citigroup Citigroup Capital Dwindles.

Citigroup Inc.'s investors, cheered by a $5.1 billion first-quarter loss that wasn't as big as they feared, now must watch out for asset sales, a dividend cut and an infusion of outside investment as the bank's capital dwindles.

My Comment: Citigroup will have no choice but to cut the dividend again.

Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

"We're in a recession, they have a huge consumer book, and there's huge double-digit-billion provisions that they're going to have to take in the next 18 months to two years," CreditSights Inc. analyst David Hendler said. "They're undercapitalized for their risk."

A weakening U.S. economy and rising consumer delinquencies have forced Chief Executive Officer Vikram Pandit and Chief Financial Officer Gary Crittenden to back away from assurances earlier this year that the bank didn't need to raise more capital. In January, Crittenden said Citigroup "stress-tested" its assumptions under "multiple recessionary scenarios."

My Comment: It looks like Citi is applied wimpy amounts of stress in January given the stress tests have already failed.

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, Korea and Kuwait. The infusion helped boost Citigroup's Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year.

Yesterday Pandit said he's selling assets and shedding units outside the retail banking, trading, investment-banking and transaction-processing businesses. He's cutting about 9,000 jobs over the next year, on top of 4,200 announced in January.

My Comment: 8.8% is now 7.7% and shrinking. Citigroup will soon need to sell more assets or cut its dividend or both. I predict both.

Is Citigroup's Dividend Safe?

Dateline March 5, 2008: Olstein Capital Management says Citigroup Shares May Double in 2 Years and dividend is safe.

"Even though there's bad news still to come in Citibank, it's discounted already," said Robert Olstein, who oversees about $1.3 billion as chairman of Olstein Capital Management. "This stock in two years is going to be in the mid-40s. You've got to be forward looking."

"They're not cutting the dividend and they are not going to go back for more capital," Olstein, whose firm owns 1.7 million Citigroup shares, said after U.S. exchanges closed today. "They're OK."

For a discussion of Citigroup's dividend please see Is Citigroup's Dividend Safe?

Citigroup has been borrowing money at 6.875% and higher while paying approximately $6.6 billion annually in dividends. This is not a viable long term strategy.

Paying dividends in this situation does not make economic sense. It only makes sense in the twisted logic of attempting to support share prices short term. Having built up a false impression that no further dividend cut is coming, the market reaction will be that much worse when it does come. That is the mistake all these companies make attempting to manage earnings and growth over the short term.

Capital Problems at RBS, Barclays, HBOS, others.

The Telegraph is reporting Royal Bank of Scotland will spur others to go cap in hand.

Britain's banks have been in denial. As one shareholder put it: "All of them agree that the industry as a whole needs to be better capitalised but none believes the observation applies to them individually."

Royal Bank of Scotland may need capital more urgently than most, but its decision to tap shareholders makes it easier for rivals to follow suit.

Analysts believe Barclays and HBOS, at the very least, will have to give it serious thought. Credit Suisse reckons Barclays could do with £6bn of capital and HBOS £4.5bn, compared with the £12bn it says RBS needs.

Political pressure for the banks to strengthen their finances, as a "quid pro quo" for the £50bn-£100bn of liquidity support the Government is planning, might tip the scales. Both HBOS and Barclays have been in contact with regulators about their capital positions.

With sub-prime provisions worsening and bad debts on UK mortgages certain to rise as house prices stumble and mortgage costs soar, the banks have been told they need to be in as strong a position as possible.

As the tables show, Barclays and HBOS have the weakest capital positions after RBS. Barclays, in particular, is exposed to worsening sub-prime conditions that threaten its capital. [click on chart to enlarge]

For them, the issue may be whether to sell assets or to go to shareholders. As is thought to be the case with RBS, a rights issue would be accompanied by a dividend cut, making it a far less attractive option. But the scale of the funds Credit Suisse estimates the two lenders require would suggest they have little choice.

Alliance & Leicester and Bradford & Bingley are considered next at risk. Although B&B has a strong capital position, analysts expect its mortgage bad debts to mount rapidly as it is a specialist in buy-to-let and self-certification, areas of the market considered higher risk.

Thanks to the Telegraph for that snip. There is a larger version of the above chart and other discussion in the original article that inquiring minds may wish to consider.

Dividend Cuts Under Discussion

Dividend cuts are now under discussion at several banks in Europe and probably more. Note that the Tier 1 capital ratios are worse at Royal Bank of Scotland - 4%, Barclays - 4.8% , HBOS - 5.7% , Lloyds TSB - 7.3%, and Alliance & Leicester - 6.9% than at Citigroup - 7.7%.

Of course the next question is how much level 3 assets, SIVs, and other off balance sheet garbage are the above hiding? Whatever it is, things do not look good for the entire group. Dividend cuts and more capital raising is in store for all of the above as the recession deepens.

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