Just when deposits became the big prize in banking, Citigroup Inc missed the brass ring.
The bank’s proposal two weeks ago to buy Wachovia Corp would have created the biggest pool of deposits in the US — “unassailable” as a source of stable, cheap funding and “well in excess of the next-largest competitor,” Chief Financial Officer Gary Crittenden said at the time.
Instead, having lost a takeover battle with Wells Fargo & Co, New York-based Citigroup slipped to number four in deposits and has to hustle for them alongside banking newcomers Goldman Sachs Group Inc and Morgan Stanley. With debt markets in flux and terms of the government’s bailout plan changing by the week, Citigroup needs more deposits to temper a surge in the cost of financing its $2.05 trillion balance sheet.
“Clearly they missed out,” said Stephen P Wood, a senior portfolio strategist in New York for Russell Investments, which has $180 billion in assets under management, including at least 5.8 million Citigroup shares. “Short-term credit is dried up. Those institutions with long-term asset bases and lower costs of capital are in a more profitable situation.”
Total deposits at Citigroup fell 2.9 per cent in the third quarter to $780.3 billion, while New York-based JPMorgan Chase & Co, Wells Fargo of San Francisco and Bank of America Corp in Charlotte, North Carolina, reported gains. JPMorgan’s deposits rose 34 per cent to $969 billion, fueled by last month’s takeover of Seattle-based thrift Washington Mutual Inc.
Bank of America said deposits increased 11 per cent to $874 billion, including accounts gained with the July purchase of Countrywide Financial Corp. and inflows from retail customers three times greater than the industry average.
Wells Fargo’s deposits climbed 4.3 per cent during the quarter to $353.6 billion. With the $447.8 billion of deposits that Charlotte-based Wachovia reported as of June, Wells Fargo will leapfrog over Citigroup to $801.4 billion.
Citigroup spokeswoman Christina Pretto said that even with the third-quarter decline, overall deposits remain “strong”. What’s more, “we have seen strong deposit inflows from our main deposit-gathering business, corporate clients, including $55 billion at the end of September alone,” she said.
After about $660 billion of writedowns and loan losses at banks worldwide, investors already wary of buying long-term bonds from financial institutions are increasingly unwilling to buy their commercial paper, or debt that matures in less than nine months.
The quoted rate on three-month notes for Citigroup, the world’s third-biggest issuer of commercial paper, was 4.32 per cent on Oct. 17, up from 2.75 percent a month earlier, according to data compiled by Bloomberg. The rate is well above the Federal Reserve’s 1.5 percent target rate for overnight bank loans — so high that Citigroup and other companies have had to shift to shorter maturities for commercial paper, including overnight, where rates are lower. Before August 2007, when surging subprime-mortgage defaults began to roil credit markets, Citigroup could issue three-month commercial paper near the target rate.
Citigroup had about $29 billion of commercial paper outstanding as of September 30, spokeswoman Pretto said. Among US commercial-paper issuers, it ranks behind only General Electric Co. of Fairfield, Connecticut, with $88 billion, and JPMorgan, with $55 billion, according to their earnings statements.
Recent government actions have helped drive down average rates on short-term notes issued by financial institutions. On October 7, the Fed announced it would provide a “backstop” for the $1.5 trillion commercial-paper market by agreeing to buy the debt from banks and other companies when investors are scarce. Last week the Federal Deposit Insurance Corp. said it would guarantee newly issued debt of the nation’s banks, including commercial paper.
Average rates on three-month commercial paper issued by banks fell to 3.55 per cent on October 16 from a nine-month high of 3.99 per cent on October 6, according to Fed data. They are still well above the August average of 2.76 per cent, before the bankruptcy of New York-based Lehman Brothers Holdings Inc.
“Credit markets will need much more time to digest and react to the new programs put in place,” CreditSights Inc analyst Brian Yelvington said in an October 16 report.
That may help explain why Citigroup representatives fanned out across San Francisco’s financial district on October 17, handing out fliers promoting six-month certificates of deposit with 4 per cent interest rates. Similar fliers are going out this month in every major market where Citigroup operates, as part of a drive led by Citibank North America CEO Peter Knitzer to recruit new savers, spokeswoman Janis Tarter said.
The average rate Citigroup was paying on deposits in the third quarter was 2.9 per cent, according to a presentation on its Website.
Vikram Pandit, Citigroup’s chief executive officer, is struggling to end a yearlong string of net losses totaling $20 billion amid the worst financial crisis since the Great Depression. The bank reported a $2.82 billion third-quarter loss last week after writing down securities lin ked to mortgages and credit-card loans.
“Citigroup’s failure to secure a merger agreement with Wachovia, which would have improved Citi’s funding profile and earnings over time, magnifies the macroeconomic headwinds the company faces,” Deutsche Bank AG analyst Mike Mayo said in an October 10 report.
Citigroup’s deposits represent 38 per cent of total assets compared with 57 per cent at Wells Fargo, 48 per cent at Bank of America and 42 per cent at JPMorgan.
Crittenden, Citigroup’s CFO, said in an October 16 interview that the bank’'s deposit base was “a very large number by any measure” and that the company has a higher percentage of long-term debt funding its assets — about 20 per cent. At Wells Fargo, the figure is 17 per cent, compared with 14 per cent at Bank of America and 12 per cent at JPMorgan.
Citigroup’s deposits outside the US, about 64 per cent of the total, shrank in the third quarter, partly because they were in foreign denominations that slid against the dollar, Crittenden said. About $13.5 billion of the $23.2 billion decline in total deposits stemmed from Citigroup’s pending sale of its consumer-banking unit in Germany, he said. The bank sold the operations partly to capture an after-tax $4 billion gain that will bolster its capital base.
