Goldman on Citi - SELL before the next $15bn hits
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"With $84bn in SIVs and $73bn of ABCP facilities providing ample material for additional nasties to emerge, Goldman estimates that the bank could fall nearly $4bn short on its pledge to meet 7.5 per cent Tier-1 capital ratio by the end of the second quarter next year."
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Goldman on Citi - SELL before the next $15bn hits
The golden child of the banking world has turned on the prodigal son. Goldman Sachs - which will not, repeat not, be making significant write-downs - has had it with the cult of the disappearing dollars elsewhere on Wall Street.
The bank’s analysts have slapped a sell order on Citigroup, downgraded their estimates, and lowered their target price to $33. US futures fell on the back of the note. Citi were down 2.6 per cent at $33.11 a share in premarket trading.
Citi’s down 40 per cent this year, and 28 per cent over the past three months, but the team at Goldman believe that the rudderless banking behemoth has further to fall.
We see four factors driving underperformance: (1) additional write-offs on its remaining $43 billion of CDO exposure, (2) pressure on the firm to shore up Tier-1 capital ratios which may need to come from an equity infusion, asset sales, or a reduction in the dividend, (3) deteriorating consumer credit trends and higher corresponding provisions and charge-offs, and (4) no clear leadership at the firm.
Citi has already said that it will face $8 to $11bn of write-offs on its CDO porfolio in the fourth quarter. Goldman think that will come it at the top end of the range, with a further $4bn to come in the first quarter of next year.
With $84bn in SIVs and $73bn of ABCP facilities providing ample material for additional nasties to emerge, Goldman estimates that the bank could fall nearly $4bn short on its pledge to meet 7.5 per cent Tier-1 capital ratio by the end of the second quarter next year. Citi has indicated that it will not take assets from the SIVs it manages onto its balance sheet, notes Goldman, but the bank has already provided $10bn in emergency funding to the vehicles.
A Tier-1 shortfall would leave Citi facing some rather unpalatable options to boost its ratio from their estimate of 7.2 per cent to the desired level, including cutting its dividend, issuing equity and asset sales. Which of those is preferred will very much depend on who ends up in Chuck Prince’s recently vacated hotseat.
The bad news for Citi isn’t contained to its CDO and SIV exposure, argues Goldman’s William Tanona. With the US consumer under pressure and housing metrics proving increasingly dire, the bank faces pressure across its businesses. And with an absence of leadership and the impetus on getting the firm’s risk management under control, Tanona adds that Citi may be unable to move on new opportunities and put its meaty balance sheet to good use as openings appear.
That, suggests Goldman, may prove debilitating into late 2008 or even 2009.
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