Hot Stocks: Citgroup to Buy Back Billions in SIV Assets, May Face Another Write-Down

William Patalon III
November 21, 2008 — 1,427 views  
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Embattled U.S. banking giant Citigroup Inc. (C) has agreed to buy back $17.4 billion of assets remaining in a series of funds known as structured investment vehicles, or SIVs, after it previously agreed to guarantee the liabilities in those funds.

In a separate story today (Wednesday), Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year's final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.

"The key question is whether management will be able to continue to find buyers for business units, which is necessary to fortify the capital base against further credit losses and write-downs," Trone, an analyst with Fox-Pitt Kelton Cochrane Caronia Waller, wrote in a research note to clients.

Fox-Pitt boosted its quarterly loss estimate for Citigroup from its prior projection of only 8 cents a share all the way to 79 cents a share. The brokerage then cut its profit estimate for 2009 from its earlier estimate of 69 cents per share all the way down to 28 cents, Reuters reported.

Trone, who rates Citi shares as performing "In Line" with the general market, cut his target price on the shares from $20 to $16. From Tuesday's closing price of $8.36 a share, even that lower target price would represent a return of 91%.

Worries about Citigroup's problem assets will continue to weigh down investor confidence, Trone wrote. Thus, while Citi is definitely a "cheap" stock by one key measure, it isn't necessarily a bargain.

"Citi trades below tangible book, although we believe this is at risk given still-large problem asset exposures," Trone wrote.

Citigroup's shares have traded as high as $35.29 in the past 52 weeks. Its market capitalization (market cap) - the actual value of a publicly traded company - has plunged from $195 billion at the stock's 52-week high to just under $41 billion today.

A new report states that Citigroup has slipped to the fifth-largest U.S. bank by market value, falling behind U.S. Bancorp (USB). The top five are JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Bank of America Corp. (BAC), U.S. Bancorp and Citigroup. Less than two years ago, Citigroup was on top of that list.

As for the asset buyback, Citi said it's moving the structured investment vehicle assets into a portfolio of assets held for sale. The transfer allows the SIV funds to fully repay maturing debt obligations. It will be accounted for as a "cashless" transaction, since the funds were essentially already on Citi's balance sheet. In fact, the assets will be labeled as being "available for sale" basis, meaning changes in their value will affect the company's balance sheet equity - but not its earnings, Reuters reported.

Back in December, Citigroup agreed to support the SIVs, which at the time held roughly $49 billion of assets. At one point, the bank's SIVs were actually "off-balance-sheet" entities, holding roughly $100 billion in assets.

A SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher rates of interest. If managed correctly, fund investors can make a profit from the difference.

SIVs proliferated, and were in widespread use by investment banks and other financial institutions. But they ran aground when the credit crisis caused the demand for short-term bonds and commercial paper to evaporate. SIVs saw the value of their holding plummet, forcing institutions such as Citi - which had been operating the funds as off-balance-sheet funds - to prop them up with financial support.

This is the latest move Citigroup - one of the hardest-hit by the worldwide financial crisis - has been forced to make as it struggles to get back into the black. Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs.

On Monday, Citi unveiled plans to cut more than 50,000 jobs in the "near term" and slash expenses by 20% to preserve capital as it faces a global slowdown that's expected to push well into 2009. The cuts are on top of the 23,000 jobs eliminated so far this year and are part of Chief Executive Officer Vikram Pandit's plans to whittle the bank's work force down to 300,000. By the time Pandit puts down the corporate-cost-cutting machete, he'll have lopped off about 20% of the company's work force.

At its peak at the end of 2007, Citigroup had a work force of 375,000.

Just last week, as Money Morning reported, Citigroup announced the release of 10,000 employees, and said it was boosting interest rates an average of 3% for about one-in-five of its credit card holders. Read More

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About the Author

William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editor for The Money Map Report. Patalon spent 22 years as a journalist, most of it covering financial news as a reporter, columnist, and editor that included stints with Gannett Co. Inc., and The Baltimore Sun.

William Patalon III