Citi: Citigroup has worked out a neat deal to exit the U.S. government’s Troubled Asset Relief Program. This is certainly progress. But Citi is leaving intensive care still dependent on easy money painkillers from the Federal Reserve. The bank is gaining strength, but is not yet healthy.
The bank’s exit from the TARP trap had to meet a complicated set of criteria. Citi had to pay back the US Treasury’s $20 billion preferred investment. To make a clean break, it also needed to cancel the government's loss-sharing agreement on $250 billion of toxic assets. At the same time, it was crucial to avoid any significant deterioration in capital ratios - all of which it has achieved.
The company will issue as much as $19.5 billion of new common stock, as well as $3.5 billion of so-called “tangible equity units,” the bulk of which will be counted as common equity. As a result, Citi estimates its tangible common equity (TCE) — its cushion to absorb losses – will rise by $15 billion to $117 billion. The bank says its TCE-to-risk weighted assets ratio will remain steady at 10.3 percent, because canceling the loss-sharing deal brings extra assets into the equation.
It’s a big improvement on a year ago, when the bank’s TCE had fallen to $30 billion - a quarter of its current level. By Citi’s figures, other key capital ratios now top those of JPMorgan Chase and Wells Fargo and match or beat Bank of America's after its recent TARP exit – perhaps ticking another box for Treasury.
The deal will also save Citi $2.2 billion in annual preferred interest and operating expenses, offsetting the dilution for existing shareholders from the issuance of new shares. The government will also start selling its Citi stake – beginning with a $5 billion chunk.
At the current price of the bank’s shares, it will even make a modest profit for taxpayers. This is good news all round, but leaving the hospital is in some ways only the beginning. Like other banks, Citi’s ability to make money – and avoid further losses on assets – still depends on low interest rates and other support courtesy of the Fed. Vikram Pandit, the Citi chief executive, also has work to do dispelling Citi’s image as a behemoth that can’t be managed. He needs to get on with divesting the assets in Citi Holdings, the vehicle that holds businesses deemed non-core. And even in core businesses, consumer-related headwinds and the upheaval of recent years have prevented recent earnings matching those of rivals. Significant rehabilitation is needed before Pandit can claim Citi has been restored to full health.