UBS Analyst: Citigroup Likely to Issue Common Equity By 2010

The government-backed rescue of Citigroup Inc. (C) won the praise of analysts and investors on Monday, sending its shares up more than 55%, but it also brought into focus the likelihood of the bank potentially issuing more common equity.

There is little doubt that Citigroup is in better shape now, but there is surely more to come as it is expected to sell non-core assets, cut costs and reduce its balance sheet leverage.

As part of the rescue plan, Citigroup will halt dividend payments for the next three years to help pay for the government’s $27-billion in preferred shares that pay an 8% dividend. Since Citigroup’s tangible common equity is now even lower as a percentage of total equity, and losses on remaining exposures will eat into Citigroup’s capital position, the bank will likely issue common equity by early 2010, UBS analyst Glenn Schorr said in a research note.

He noted that it is tough to run a bank with common equity that’s too low. However, the analyst does not expect that the government or ratings agencies will force them to do so too quickly.

Mr. Schorr pointed out that each $10-billion of common equity raised at $8 per share leads to around 15% dilution. Since Citigroup has now issued $52-billion of preferred to the government, “the future dilution from truing up the balance sheet could be significant,” he said.

Citigroup is also on the hook for the first $29-billion of pretax losses on the $306-billion of assets being backstopped by the government, along with 10% of the subsequent losses thereafter. It also has a big balance sheet that includes exposures that could deteriorate further in a tough economy. So while Monday’s transaction is a positive step, Citigroup is not out of the woods yet.

Comments

[ggbbppl:]

what can we American learn from the Japanese economic in the 80 and 90? are the finanical system worst? the Japanese try the same things the american are doing now in the financial market nothing work . let the investments bank and other bank fail. now clean up the financial system and start fresh. secertary elect fail 250 weeks , paulson fail 6 weeks and fed chairman fail 8 weeks . i think these guy are bailing out their friends.....

2008 Nov 25 02:15 PM

[mkreisel:]

Well, the Japanese didn't have to line up outside soup kitchens, and neither did they develop any crazy ideologies.

2008 Nov 25 08:57 PM