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Citigroup (C)
Lights Have Gone Out in The Citi (C)
The hits have been coming fast and furious for Citigroup. The financial behemoth has had a tough last six months and this week alone, its stock is down over 10%. Citi and CEO Vikram Pandit have had to deal with a spate of bad news this week starting with the filing of a lawsuit against them pertaining to a credit default swap agreement to the head of a Middle Eastern investment fund making public statements about how dire the capital situation at Citigroup is. A lot of banks have taken massive write downs recently but now it looks like they have faded into the background leaving the house Sandy Well built (or bought depending on how you look at it) as the poster boy of the mortgage mess. Why is Citigroup being singled out and can it deal with the wrath of investors who have pushed its stock below book value?
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A year ago at this time, Citigroup was trading just above $50. This afternoon, shares were changing hands for just over $20. By comparison, Citi's book value (which is a measure of what shareholders would receive if the bank's assets were liquidated today) as of the end of 2007 was $22.74. That shows you what investors think of the company's balance sheet. Citi, which is the largest bank in the country by assets, now just has a market cap of $107 billion. Why is the street so pessimistic? The main reason is probably fear of the unknown. A lot of banks (such as Merrill Lynch (MER: Charts, News, Offers) which slashed its earnings estimate of Citi this week) came clean last year and marked down their mortgage assets substantially resulting in heavy losses. But most of them successfully convinced Wall Street that they had shed all their dirty laundry and all the write downs had been taken. Citigroup took markdowns too, in fact, it took over $20 billion them including $10 billion in the last quarter of '07 alone, but investors believe there is more to come.
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Most on the street are predicting that Citigroup will take another write down of close to $14 billion in the first quarter of 2008 and that is unnerving for numerous reasons, among which is the fact that no other bank is expected to take as big a hit, plus it also means that Citigroup will have to pick up the phone and start asking for money again. Last year, Citi received about $26 billion in capital infusion from sovereign wealth funds in countries such as Abu Dhabi and Kuwait. These infusions, though needed, are extremely dilutive for current shareholders because essentially a sizeable stake in the company is being sold at a distressed discount. The fear is that Citigroup will need another capital infusion and those concerns were fanned earlier this week when Sameer Al Ansari, chief executive of Dubai International Capital, said as much during an event. The street quickly came to the conclusion that he had already been solicited by Citirgoup for capital and that pummeled the stock. Dubai International Capital had since backtracked on those comments a bit.
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Besides the write downs, there are two other huge question marks over Citi. One is the competency of the management and the board. Just how they could have built up such untenable positions in the mortgage market and not seen the crash coming sooner is incomprehensible to investors who expect top-class risk management at a company of Citi's stature. Even though Chuck Prince is no longer running the show, there isn't much confidence in CEO Vikram Pandit, who has never run a public company before let alone one of Citi's size. The other question mark is the business model. More and more investors are disillusioned with the 'financial supermarket' pitch that Citi has championed. It's not working and the much ballyhooed synergies can't be worth $20 billion in losses. There are a lot of financial stocks out there that have been unjustly punished and which therefore, present themselves at compelling valuations. Citigroup is not one of them and therefore is not a viable trading vehicle, not on the long side at least.
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