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Citigroup Inc is considering cutting its cash on hand by about $35 billion, which should help the bank buy higher yielding assets or redeem expensive debt to boost earnings.
Making the change will signal that the management of the third-largest US bank by assets, which had to be rescued three times by the US government in the financial crisis, is increasingly confident that its worst troubles are well behind it.
The move could give a 2 per cent boost to Citigroup's bottom line this year and keep the bank's lending margins relatively strong even as competitors suffer from low interest rates.
The bank has enough liquid assets to cover an estimated 37 days of the cash drain expected in a scenario of acute stress under pending new regulations, based on Citi's financial reports through December. Treasurer Eric Aboaf and other executives would like to reduce that to about 33 days of coverage, or 10 per cent more than is to be required under the new international rules known as the Basel III liquidity coverage ratio.
"In the framework of managing a company efficiently, that would be a good thing to do_ over the next year or so, Aboaf told Reuters in an interview.
While the move would reduce the bank's pool of cash and liquid assets by about 10 per cent, Citigroup would still have 10 per cent more liquidity than regulators say they will demand. JPMorgan Chase & Co, which analysts and investors often see as a stronger bank than Citigroup, is below the pending regulatory minimum.
Citigroup may feel more confident, but the bank is also leaving itself a little more vulnerable to big swings in markets and economies around the world. Cash on hand is critical for staving off runs on the bank during bad times.
The Federal Reserve has not commented publicly on Citigroup's liquidity, but earlier in March it approved the company's capital plan as strong enough to withstand a stress test. The US regulator is part of the international body that has drafted the new liquidity requirement that Citigroup exceeds.
"At the moment it is appropriate for Citi to take down their cash, but if we end up with very volatile capital markets and Citi is caught in that, then people will start to question them,_ said Charles Peabody of Portales Partners, a research firm for institutional investors.
Given Citi's huge problems in recent years it might seem surprising that it has so much leeway to reduce cash. By contrast JPMorgan, which maneuvered through the financial crisis less scathed than most major US banks, has estimated it is 17 per cent short of the expected Basel III levels, which are to be phased in by 2019.
Citigroup has had to be more conservative than JPMorgan because investors and regulators were less confident in it, but Citi's fortunes have turned, thanks in part to the US housing market stabilising.
During the financial crisis, while Citigroup struggled to survive, the US authorities turned to JPMorgan to help them salvage failed financial institutions.
Even as recently as a year ago, Moody's Investors Service cut Citigroup's ratings as part of a broader financial services review globally. In March of last year, the Federal Reserve publicly rejected Citigroup's capital plan. It was a blow to confidence in the bank, as well as a sign of Citigroup's strained relationships with regulators. Executives at Citigroup had other reasons to be cautious too, including the European debt crisis, and the bank's portfolio of troubled mortgage assets left from the financial crisis.
But in recent months, the tide has turned. The bank has changed its leadership, pushing out Vikram Pandit and bringing in Michael Corbat, who has been assiduously building bridges with regulators. With the US housing market starting to recover, the bank's losses on its portfolio of bad assets are abating, and the bank passed the Fed's stress test this year. In fact, that test suggested that Citigroup is safer than JPMorgan now. The regulator approved a plan for Citigroup to return $1.2 billion of additional capital to shareholders.
The bank's liquidity pool has reflected this shift. At the end of March 2012, Citigroup had $421 billion of cash on deposit at central banks and other unencumbered liquid assets, enough to cover about 43 days of acute stress and equal to about 22 per cent of the bank's total assets, more than twice the percentage at the end of 2007 when the financial crisis had just taken hold.
In the middle of last year, as things started looking up for the bank, it quietly began to tap its liquidity, a move that accelerated in the fourth quarter as the company reduced its long-term debt by $32 billion and cut interest expense.
The draw left Citigroup's pool of liquid assets at $354 billion at year-end, $67 billion less than in March last year, but still at a level that CreditSights senior analyst David Hendler calls robust.
"You really don't need that much liquidity," said a bond investor at a large money management firm who buys Citi debt and who declined to be named. He called the pile "excessive".
Citigroup had $1.86 trillion of assets at the end of December.
