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The Black Swan Analysis
Towards The End of 2008, Citgroup Inc. was in a Near-Death Situation. B&E had trashed The Bank like nobody’s business. But 2010 changed it all. Five Consecutive Quarters of Sustained Profits is enough an Indication that The Slumber is a Bygone phase and that it’s time for us to Eat our Words. B&E does an Atypical Taleb’ian black Swan Summary review of The Progress.
Issue Date - 26/05/2011
When Sanford I. Weill and John Reed took the visionary decision of merging the insurance giant Travelers Group and the then largest bank Citicorp, in 1998, to create a financial superpower ‘Citigroup Inc.’, not even their worst nightmare had provoked them to think that a decade later the same Citigroup Inc. would be on the verge of a collapse. The merged entity was conceived to dominate the financial sphere, and in an irony of sorts, it was dominated by years of lackluster results and a near-death experience in late November, 2008. Thanks to its aggressive real estate bets, which eventually registered losses worth tens of billions (Citigroup lost $253 billion of its market value in a year’s time and was valued at $20 billion at a share price of $4 by the end of 2008), the once financial giant, often termed as ‘Too Big to Fail!’, was in the worst shape amongst the major banks, so much so that it had to opt for a $45 billion government sponsored bailout package, under the Troubled Asset Relief Programme (TARP). But, blame it on the vagaries of financial markets and global economy, Citigroup continued to bleed in 2009 and its share price dipped to as low as 97 cents on March 5, 2009.

So much so for its tattered past. In what can be termed as a classic case of the rise of the phoenix, Citigroup, in 2010, after having repaid $45 billion of US taxpayers cash, posted runaway profits to the tune of $10.6 billion (its first full year profit post the financial crisis when the prospects of a widespread loan default had apparently forced it to set aside billions of dollars to cover the losses). And not only 2010, this better-than-expected improvements in credit quality and trend of positive results for Citigroup and its shareholders are continuing in 2011 too. For the first quarter results declared on April 18, 2011, Citigroup reported a net income of $3 billion, or $0.10 per share, as compared to $1.4 billion in Q1 2010, or $0.04 per share. While the group’s loan loss reserves stood at $40.7 billion, or 6.3% of its loan balances, its Tier 1 Common ratio increased from 9.1% in Q1 2010 to 11.3% in Q1 2011 clearly showcasing the group’s growing capital strength.

So, can we say that two years post its virtual death, Citigroup is finally in a recovery mode and all set to make up for its lost time? Perhaps ‘yes’, if Citigroup’s CEO Vikram Pandit’s words are anything to go by. “We will continue to make progress in 2011 by executing our strategy with discipline. Citi Holdings’ losses continue to decrease; we are investing in our core businesses in Citicorp; our capital strength has improved; and the mix of revenues reflects the diversity of our businesses and our depth in both the emerging & developed markets,” said Pandit while announcing the first quarter results for 2011. Citigroup called up B&E just before this piece went to print informing us that their US offices would give their side of the story.

No doubt, over the last one year, Citigroup has turned around the corner; selling off troubled assets (for instance, divestiture of Student Loan Corporation), employee layoffs (close to 100,000 employees were laid off), focusing on core business and taking salary cuts, the overhauling efforts of its CEO have proved to be in the right direction. Moreover, Citicorp generated 62% of its revenues and 72% of its net income from its international operations in the first quarter of 2011, which surely reflects Citigroup’s diversity of business and its depth in both emerging and developed markets. However, a closer scrutiny of the results reveal that investment banking revenues dipped by about 19% (y-o-y basis) to $851 million primarily reflecting lower revenues from municipal and investment grade debt underwriting, which is surely a concern going forward.

In fact, this segment of the results is apparently a big black eye for Citigroup considering that its competitors continue to garner big bucks from the segment. For instance, while JP Morgan’s investment bank recorded a profit of $2.37 billion in first quarter of 2011, Bank of America managed to post a 26% increase in revenue from investment banking fees during the same period. It is because of this realisation that Citigroup is now turning its attention to securities and investment banking business units and might soon churn out big money from the business.

Further, with the cosmetic reverse split (1:10, which will effectively lower the share count to 2.9 billion) Citigroup’s shares, which last changed hands at $4.52 (on Friday, May 6, 2011), are now trading in the range of $45-50. This clearly indicates that Citigroup is hell bent on rehabilitating its image with the investor community. As a matter of fact, Richard Parson, Chairman, Citigroup is of the firm belief that the timing of the reverse split signals the fact that crisis is far behind and that confidence has been restored.

No doubt, compared to the dismal 2007, 2008, and 2009, five consecutive quarters of sustained profitability means a lot to Citigroup; but then, when compared to its peers, Pandit has a long way to cover before he fully awakens the Citi.

Gyanendra Kumar Kashyap           

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