C - Citibank

[wescobrk]

They earned 13.7 last year.

They aren't really doing much besides letting Citigroup holdings run off.

I think simon could turn this around very quickly but he is taken.

Their earnings estimates are already down 40 cents thus year.

There is a lot of frustration they don't seem to be working very hard.

With all of their failures of late maybe they can't even get citi holdings to run off.

This stock requires a lot of patience!

 

 

[moody202]

Citigroup will recover over time and this isn't the end of the world but I think they need a new CEO asap.

 

I agree...this CEO can't seem to get it done!

 

disagree with firing the CEO again!

This is not a management problem, this is more of a historical culture problem. This could be a good thing for the bank in the long run, if this leads them to improve their risk controls and get a better handle on their widely dispersed empire.

 

Respectfully disagree....historical culture problem or any other problem, its for management to fix.

 

What the Fed seems to be saying is that there are holes in Citi's analysis. While I can buy that Fed is trying to show they are working & regulating, but it does shows of the 25/30 banks that submitted plans, citi was one of the weakest!

 

I don't like to buy shares when I don't have confidence in management. My gut it telling me the management doesn't have things under control...so I am going to stay away. Not a buyer !

 

[wescobrk]

Is it possible they can resubmit and get approved in 3 to 6 months or do they have to wait another 12 months?

[tng]

I don't know why Citi did not modify their request after last week's results came out. Analysts were concerned that BAC's plan would get rejected and they estimated that the Fed would be okay with a $6B return and that is exactly what BAC asked for in their revision. The Fed moved the goal posts this year and made the stress test more severe. Citi just seems to be one step behind. This doesn't hurt intrinsic value much if Citi can just lower their request a tiny bit. But it doesn't inspire much confidence in management when they seem to be one step behind every single time.

[wescobrk]

I read they have 90 days to submit.

Of course the market is treating as it's gone for another 12 months.

Corbat isn't inspiring confidence when he said he hasn't determined when they will submit.

He should make this a top priority and find the weaknesses the Fed has said they have repeatedly ask then ask for a reduced amount.

Probably should forget the dividend entirely since it has a higher threshold and lower the buyback as well to 5 billion.

 

The only US bank to fail besides Zion.

Not exactly their finest hour.

40 billion cheaper than bac based on after market trading.

[wescobrk]

One more post, citi was projected to lose 45 billion compared to bank of America's 49 billion.

This should be a relatively easy fix as bac and Goldman revised their plan in less than 4 days.

Maybe corbat can keep his job if he resubmits within 5 days and takes some urgency here.

 

[morningstar]

BAC and Goldman had initial plans that would have failed on a quantitative basis, marginally, but were otherwise ok. It's easy to fix that by shrinking the requested capital return. For Citi the problem was a lot more complicated and will take a long time to fix. It's not even clear whether it can be fixed straightforwardly, as operating with adequate internal controls in emerging markets might be very tough or impossible. Certainly it's not something they were going to fix in a week.

[vinod1]

BAC and Goldman had initial plans that would have failed on a quantitative basis, marginally, but were otherwise ok. It's easy to fix that by shrinking the requested capital return. For Citi the problem was a lot more complicated and will take a long time to fix. It's not even clear whether it can be fixed straightforwardly, as operating with adequate internal controls in emerging markets might be very tough or impossible. Certainly it's not something they were going to fix in a week.

 

+1

 

After the company announced a $400 million fraud at a foreign branch and had to revise its financial statements, did regulators really have a choice?

 

Vinod

[wescobrk]

Cramer said they need to issue 50 million shares at 45.

I dont understand his logic at all.

There seems to be a lot of confusion as he is thinking it's a quantitative issue.

 

The Fed did say they made a lot of progress so maybe its fixed in a week or maybe 30 days.

If it isn't fixed quickly it may be until March of this year.

 

 

[rpadebet]

BAC and Goldman had initial plans that would have failed on a quantitative basis, marginally, but were otherwise ok. It's easy to fix that by shrinking the requested capital return. For Citi the problem was a lot more complicated and will take a long time to fix. It's not even clear whether it can be fixed straightforwardly, as operating with adequate internal controls in emerging markets might be very tough or impossible. Certainly it's not something they were going to fix in a week.

 

+1

 

After the company announced a $400 million fraud at a foreign branch and had to revise its financial statements, did regulators really have a choice?

 

Vinod

 

+1

 

It's not the size of the capital return requested.

I think fed was surprised with the Mexican fraud. They want Citi to spend the capital to first fix that. So I think we can just forget about this year's incremental capital return.

 

[wescobrk]

Actually the Fed didn't specify the banamex issue at all.

They specified the London whale when jpm suspended their buyback.

I was surprised the Fed didn't mention banamex.

That would have made more sense if they put that as to their concerns.

[rpadebet]

Actually the Fed didn't specify the banamex issue at all.

They specified the London whale when jpm suspended their buyback.

I was surprised the Fed didn't mention banamex.

That would have made more sense if they put that as to their concerns.

 

If they felt that was an isolated issue like the london whale, they probably would have mentioned. What if they felt banamex indicated potentially larger control issues across the bank?

 

This is a disappointment in the short run, but I strongly feel that if Citi gets serious about its controls, it can become a very strong bank in the long run. They have just papered over these problems for a long time, its about time they get all their different parts properly integrated.

[Cardboard]

I think that people are panicking too much over this. It is true that management is looking incompetent but, there is a bigger fundamental issue.

 

The Fed only allowed BAC to repurchase $4 billion of stock and to increase the dividend to $0.05 a quarter which equates to a total of about $6 billion. Last year they were allowed to buyback $5 billion of stock, pay about $400 million in dividends and to repurchase $5 billion of preferreds. It is also quite possible that they have not exhausted the $5 billion buyback from last year, so the new $4 billion is actually $4 billion minus whatever is left.

 

What is clear from this year CCAR is that the Fed is a major obstacle for capital to return to shareholders and it will create enterprises with very low return on equity over time. These banks are clearly not allowed to make any major acquisitions going forward since they are already considered too big to fail.

 

With low organic growth, the only avenue to generate a decent return for their shareholders is for mega banks to run a very efficient operation and to return as much capital to shareholders as possible. Kind of like regulated utilities if you will. The problem that I see vs utilities is that the risk premium attached to them by the Fed is becoming too large.

 

Cardboard

[ERICOPOLY]

The stress tests have been a back-door means by which the Fed can increase capital levels at the big banks.  Each year, the effective capital level goes higher as the stress test gets meaner.

 

Recently, the Fed indicated that some banks will be allowed to return 100% next year.  This is perhaps a message that the stress tests have peaked in scenario intensity.  Meaning, if you passed the stress test this year and were allowed to return some capital, then it makes sense that if the test is identical next year you would be able to return 100%.

[rpadebet]

The stress tests have been a back-door means by which the Fed can increase capital levels at the big banks.  Each year, the effective capital level goes higher as the stress test gets meaner.

 

Recently, the Fed indicated that some banks will be allowed to return 100% next year.  This is perhaps a message that the stress tests have peaked in scenario intensity.  Meaning, if you passed the stress test this year and were allowed to return some capital, then it makes sense that if the test is identical next year you would be able to return 100%.

 

I agree that the stress tests are a way for the Fed to introduce counter cyclical capital requirements at the large banks. But if the economy improves a lot, I have a hard time believing they will not stress these guys to worse than 2009 scenarios and ask for more and more capital. Depending on the capital generation ability and the type of lending business of the banks, some maybe able to return 100%, but some will have to hold back a lot more.

 

For example, say your bank is into mortgage lending and home prices increase further but you don't increase your lending book (maybe you want to be conservative and not lend too much), but Fed will stress your book for a larger % drop in home prices compared to last year and you might have to hold more capital against the same loans this year.

 

[moody202]

After the company announced a $400 million fraud at a foreign branch and had to revise its financial statements, did regulators really have a choice?

 

Vinod

 

Great point Vinod. Maybe it has more to do with Citi's ability to control fraud in Mexico than with this submission to Fed.

[morningstar]

I think that people are panicking too much over this. It is true that management is looking incompetent but, there is a bigger fundamental issue.

 

The Fed only allowed BAC to repurchase $4 billion of stock and to increase the dividend to $0.05 a quarter which equates to a total of about $6 billion. Last year they were allowed to buyback $5 billion of stock, pay about $400 million in dividends and to repurchase $5 billion of preferreds. It is also quite possible that they have not exhausted the $5 billion buyback from last year, so the new $4 billion is actually $4 billion minus whatever is left.

 

What is clear from this year CCAR is that the Fed is a major obstacle for capital to return to shareholders and it will create enterprises with very low return on equity over time. These banks are clearly not allowed to make any major acquisitions going forward since they are already considered too big to fail.

 

With low organic growth, the only avenue to generate a decent return for their shareholders is for mega banks to run a very efficient operation and to return as much capital to shareholders as possible. Kind of like regulated utilities if you will. The problem that I see vs utilities is that the risk premium attached to them by the Fed is becoming too large.

 

Cardboard

 

While we are focusing on BAC and Citi, these are probably the two worst banks in the entire country. Recall that 5 years ago both required a second round of government support because the first $25bn each wasn't enough to right the ship - it's a pretty holey ship where $25bn doesn't plug the leaks. These are not really companies with healthy culture, effective management, or sound and stable footing for the future. They in particular are likely to be held to a higher standard, and for good reason.

 

When you look more broadly, banks are being approved for significant capital returns. e.g. Wells Fargo looks set to return nearly all its earnings this year, for probably a 12-13% return on equity. That's for a sector which is probably not out of the cyclical doldrums just yet. There are many more banks in the Wells category than the BAC/Citi category, even among the CCAR submission banks and certainly among the hundreds of smaller publicly traded banks.

 

On an unrelated note, I'd ignore the preferred share buyback as an element of capital return... I think it's reasonable to think about BAC's capital return as flat to up 10% y/y.

[fareastwarriors]

Fed Kills Citi Plan to Pay Investors

 

Bank Falls Short in Stress Test, in Blow to CEO, as Other Giants Win Nod for Big Dividend Raises

 

http://online.wsj.com/news/articles/SB10001424052702303325204579463652083306902?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

 

 

The decision took Citigroup executives by surprise, particularly since Mr. Corbat has made an effort to stay in close contact with regulators, a person familiar with the matter said. Upon learning of the news late Tuesday, Citigroup convened an emergency meeting of its board and management team, and Mr. Corbat reached out personally to regulators at the Fed, a second person familiar with the situation said. Executives have also reached out to clients to reinforce that the Fed didn't have a problem with Citigroup's capital and liquidity.

 

 

In a statement released late Wednesday, Mr. Corbat said, "Needless to say, we are deeply disappointed by the Fed's decision regarding the additional capital actions we requested." He added, "We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations." Mr. Corbat said the bank hasn't decided when the company will resubmit its plan.

 

 

In a memo sent to employees after the Fed's decision, and which was reviewed by The Wall Street Journal, Mr. Corbat said, "I am accountable for getting this right."

[wescobrk]

 

Corbat should issue a press release by next week at the latest as the pressure on him has to be enormous.

Jamie Dimon would have had a conference call today describing what he is doing.

 

Even if he says they will submit in 3 months that is better than a statement they aren't sure when they will submit.

 

How difficult can this be? They have submitted three of these. Ask the Fed what they are needing then reduce the request so the Fed can look strong.

[rpadebet]

Was reading this about the Banamex fraud

 

http://www.bloombergview.com/articles/2014-02-28/citi-paid-400-million-in-fake-invoices

 

Really surprised that in this day and age banks can get duped so easily with false invoices. Aren't there supposed to be simple common sense safeguards like, i don't know, maybe call the invoice payer to verify if the bill is authentic each time? I can even understand it happening once or twice, but eventually someone is supposed to figure out that PEMEX is not paying some of these invoices, so lets stop giving these guys more money for newer invoices. Isn't there some sort of running credit limit here?

 

Worst part is they didn't find out about this until some mexican regulator banned the fraudulent company from bidding for contracts.

 

No wonder Fed wants them to tighten up...

 

I have a hard time imagining such lax controls. In a weird way I would feel more comfortable if this were a deliberate fraud from within the bank or some sort of local bribing scheme.

 

 

[fareastwarriors]

Bad News Drew Citi CEO to Rush Home

 

Results of 'Stress Test' Mean Corbat Had to Hurry to Reassure Staff and Investors

 

http://online.wsj.com/news/articles/SB10001424052702304688104579465851513193722?mod=WSJ_hp_RightTopStories&mg=reno64-wsj

[stylized_fact]

Fed feels backlash over stress tests

 

http://www.ft.com/intl/cms/s/0/1dc73242-b5cf-11e3-a1bd-00144feabdc0.html

[wescobrk]

Its been reported he has been visiting regulators on a regular basis.

He can't be that daft to think everything was fine.

It looks like the Fed enjoys playing "gotcha".

 

It would seem a better process is they work behind closed doors instead of playing gotcha.

If their internal controls are so bad why would they let citi continue for two years with poor controls?

Seems like the Fed isn't doing their job if they only ask for something but never follow up.

[wescobrk]

This article paints a grim outlook.

Corbat and other executives met with the Fed over 100 hours and submitted a multi year plan in response to the Fed and raised loss estimates by 15 billion.

It doesn't appear they are working on submitting a new plan anytime soon.

No mention at all about banamex.

Maybe the Fed is hell bent against Citigroup returning anything till next year.

 

I guess the only silver lining is it could return about 15 billion next year.

http://finance.yahoo.com/news/bad-news-drew-citi-ceo-004700047.html

[wescobrk]

Here is one more with the Fed basically giving the middle finger.

They have nothing more to say to citi and will send a letter over the next few weeks containing deficiencies.

 

 

http://dealbook.nytimes.com/2014/03/27/failing-stress-test-is-another-stumble-for-citigroup/?partner=yahoofinance