Hex on the Citi
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One person has full confidence in Citigroup. Unfortunately, many many more do not. Investors on Thursday brushed aside Prince Alwaleed bin Talal’s statement that his Kingdom Holding investment group intended to rebuild its stake in the beleaguered bank from 4 per cent to 5 per cent. Citi’s stock, down 80 per cent this year, dropped below $5 a share. The overall bill for Prince Alwaleed’s latest Citi purchase, perhaps only about $300m, has not stopped the market openly fretting about the bank’s solvency. An unprompted vote of support from Saudi Arabia for Vikram Pandit, chief executive, only heightened swirling concerns about Citi’s management, strategy and future earnings power.
Fundamentally, though, investors worry that Citi has inadequate capital to absorb mounting loan losses and writedowns to asset-backed securities in spite of its previous capital raisings. Commercial mortgage-backed security spreads, for example, have widened since the Treasury opted not to buy up troubled assets. Indices of credit default swaps imply a 20-point fall in prices for triple A-rated assets. That has prompted fears of more writedowns to Citi’s $16.9bn commercial real estate trading book, marked at 86 cents on the dollar. The bank’s exposure represents about 17 per cent of tangible equity, estimates Sandler O’Neill, against single digits for JPMorgan Chase and Bank of America.
The big picture, though, is that the market is no longer interested in Citi’s protestations that the bank is in better shape than 11 months ago, with revenues stable, costs down and large exposures to risky assets reduced. Nor is there interest in Prince Alwaleed’s faith in universal banking. Investors, anticipating a move from regulators, are instead behaving as though Citi is cursed. It has tried all week to address the market’s fears. Now it is time to sit and wait. And perhaps to burn sage to remove the hex.
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