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Citigroup CEO says company profitable so far in 2009 - Update
(RTTNews) - Citigroup Inc. (C) was profitable through the first two months of 2009 and was having its best quarter-to-date performance since the third quarter of 2007, CEO Vikram Pandit said in a memo to the company's employees. He also said that the company was confident about its capital strength after tough internal stress tests. However, Pandit expressed disappointment with the company's current stock price and the broad-based misperceptions about the company, which according to him did not reflect the strength of Citigroup. The company's stock is currently up 16% in Tuesday's pre-market trading.
The CEO's comments come as Citigroup's share price, which once made it the world's biggest bank by market capitalization, plunged last week to near $1 per share, and after the cost of insuring the company's debt against default hit a record on Monday. Shares of banks dropped to their lowest levels in decades last week, owing to tumbling of the broad stock and bond markets. On March 5, Citigroup saw its shares being dumped below $1 to reach a low of $0.97, as investors worried about the viability of the bank and the possibility of nationalization.
In a memo to Citigroup's employees filed Tuesday with the U.S. Securities and Exchange Commission, Pandit said that the company needed to focus on two key issues, namely, capital strength and earnings power. According to Pandit, the preferred exchange announced by Citigroup nearly two weeks ago is expected to make the company the strongest capitalized U.S. bank as measured by tangible common equity, or TCE, and Tier 1 ratios.
Pandit noted that while the Tier 1 ratio will remain at 11.9% as of December 31, 2008, assuming 100% participation in the exchange, the company's TCE would increase to as much as $81 billion. He further said that despite the addition of TCE, people continued to question Citigroup's capital strength due to its net deferred tax asset and the quality of its assets.
In an attempt to allay concerns about the company's asset quality, Pandit said in the memo, "We've done our own stress testing using assumptions that are more pessimistic than the Fed has outlined and we are confident about our capital strength."
Pandit also said that even if near-term conditions deteriorate significantly, Citigroup expects to realize the majority of its deferred tax assets of $44 billion. The Smith Barney joint venture and the conversion of mandatory convertibles is expected to add another $14 billion to the company's tangible common equity over time, Pandit said.
As of December 31, 2008, Citigroup has $30 billion in loan loss reserves, or 4.3% of loans. The company noted that this was the highest among large U.S. peers. Loan loss reserves are another form of capital.
Pandit also said that the company reduced the risk assets in Securities and Banking significantly to $112 billion at the end of 2008 from $226 billion in the year-ago period. According to Pandit, only about $36 billion of these were subject to mark to market accounting at year end.
Moving on to the company's profitability, Pandit noted that Citigroup's revenues before disclosed writedowns were $19 billion in January and February alone. The company's full quarterly average for these revenues as adjusted was $21 billion. Pandit said that Citigroup's quarterly earnings, before tax and provisions, are $8.3 billion, or $33.3 billion annualized, based on 2008 average quarterly revenues and the fourth-quarter expense run rate. However, the CEO cautioned that the company was still one month away from the end of the quarter and that market volatility could alter results.
Regarding the company's stock and credit spreads, Pandit noted that the company's stock price was not an indication of its financial strength. He said that the company's pro forma tangible common book value would be $3.82 per share assuming maximum preferred conversion, and noted that the pending conversion was creating a large technical short in the company's stock that should be lifted on completion of the conversion.
"We believe our credit spreads are disconnected from our condition and are inconsistent with the government's announcements regarding support for the financial system," Pandit said in the memo.
On Monday, a report in the Wall Street Journal said, citing people familiar with the matter, that U.S. officials are examining what additional measures are needed to stabilize Citigroup, if its problems compound. Citigroup executives were called over a weekend discussion with banking regulators and Treasury officials, but the talks were reportedly geared toward future planning and no new rescue plan was on the anvil.
The federal government has come to the aid of the troubled financial firm three times, and the latest measure was announced just a few days ago.
In the latest rescue attempt, Citigroup on February 27 revealed a deal with the government, which allows the government to exchange up to $25 billion in bailout money, thereby raising the government's stake in the company to 36%. On its part, Citigroup would offer to exchange interim securities and warrants for privately held convertible preferred securities, interim securities and warrants for U.S. government-held preferred securities as well as common stock for publicly held convertible and non-convertible preferred securities.
C closed Monday's regular trading session at $1.05, up $0.02 or 1.94%, on a volume of 240.39 million shares. In Tuesday's pre-market trading, the stock is trading at $1.22, up $0.17 or 16.19%. In the past 52 weeks, the stock has traded in a range of $0.97-$27.35.
The purchase of more than eight million Citigroup Inc. shares by company insiders would be a more positive sign if the company were more clearly in control of its own future, an observer of insider transactions said.
Anthony Marchese, general partner of Insiders Trend Fund LP, is encouraged by the purchases at Citi, but he said insider buying is less reliable as an indicator when outside influences -- which in this case include public sentiment, government policy and the world economy -- loom large.
http://online.wsj.com/article/SB123673643405590839.html?mod=MKTW&ru=MKTW
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