Citigroup's third US rescue may not be its last, say analysts

The US government’s third attempt to help rescue Citigroup won’t stanch the company’s losses, which will continue to swell and may lead the bank to require more money in the coming months, analysts said.

Yesterday’s action didn’t furnish the New York-based bank with new money, although it cuts expenses by eliminating dividends on preferred stock. Instead, it converted preferred shares into common equity, which absorbs the first hit in the event of further losses, at an above-market-value price of $3.25. The stock, which has fallen 78 per cent since the beginning of the year, closed in New York trading yesterday at $1.50, its lowest since November 1990.

Vikram Pandit, 52, Citigroup’s chief executive officer, told investors yesterday that increasing tangible common equity to as much as $81 billion from $29.7 billion should “take the confidence issues off the table”, regarding the company’s ability to absorb losses. Still, Citigroup, which lost $27.7 billion in 2008, is expected to lose $1.24 billion in the first six months of 2009, according to the average of analysts’ estimates compiled by Bloomberg.

“There’s no difference here,” said Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance, California-based risk-advisory firm. “It won’t fix revenue, and you’re still going to see loss rates.”

One immediate change from yesterday’s announcement was that the value of the government’s investment fell by more than half. The government said it would convert as much as $25 billion of its preferred stock to common shares for a 36 per cent stake in the bank. At yesterday’s closing price of $1.50, that investment is worth about $11.5 billion. Citigroup has a stock market value of $8.2 billion today.

‘Ripped off’
“Taxpayers are being ripped off,” Congressman Brad Sherman, a Democrat from California who sits on the House Financial Services Committee, said in a statement. “The only thing worse than nationalising a bank is to pay for the entire bank and only get one-third of it.”

Goldman Sachs Group’s analysts, led by Richard Ramsden, recommended that investors avoid Citigroup shares because “it is unclear whether this is the last round of capital restructuring, which means that existing equity may be further diluted in the future”. The analysts also noted that the bank’s new 4.3 per cent ratio of tangible common equity to total assets falls to just 2 per cent if deferred tax assets are excluded. Those will only become valuable if and when the bank returns to profitability.

Rather than boosting confidence, the move led Moody’s Investors Service to cut its senior debt rating for Citigroup to A3 from A2 and prompted Standard & Poor’s to change its outlook on the bank’s debt to “negative” from “stable”.

“Citi will face a tough credit cycle in the next two years, which will likely result in weak and volatile earnings,” S&P analyst Scott Sprinzen wrote in a statement. “We cannot rule out the possibility that further government support may prove necessary.”

Some analysts and investors were more heartened by yesterday’s news. David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said the transaction fortifies the bank’s balance sheet, and he expects the stock to rise back to $3 “once the emotion of the moment passes”.