The Great Debate UK
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK -- Citigroup's subpar fourth-quarter showing is even more disappointing than it looks. Not only did the U.S. megabank's $1.3 billion profit, a mere 3.2 percent return on equity, miss consensus analyst estimates. It also needed some extra help from the taxman and its own reserves even to get there. Strip those items out, and the meager return in the final three months of the year dissolves into a loss of around $165 million. It's a timely reminder to shareholders that the recovering Citi is still faced with a hard slog back to decent profitability.
The funky accounting rule that compels companies to book as losses any increased valuations of their own liabilities knocked $1.1 billion off Citi's top line. But even allowing for that, Citi was in the red in its day-to-day business. Releasing loan loss provisions to the tune of $2.25 billion accounted for much of its profit last quarter. And the bank paid no tax; in fact, it received a benefit that added 29 percent to reported net income.
Granted, traders in Citi's investment bank had a slow quarter. Equities and fixed income revenue both dropped by nearly a third from the previous quarter after adjusting for the accounting hit from revaluing the bank's own debt.
Uncle Sam is ready to get out of Citi. The U.S. Treasury is set to unload its 27 percent stake in the banking behemoth roughly two years after rescuing it. The exit should deliver a healthy profit for taxpayers. That's a relief for skeptics of the bailout, and represents another financial success story for the authorities managing the crisis. But Citigroup has hardly been turned around since the government stepped in.
The sale will happen comparatively quickly for its size. Treasury has hired Morgan Stanley to trickle its 7.7 billion Citi shares into the market over the next nine months. The outline of the process will be pre-ordained to avoid the appearance of any inside knowledge or conflict on the part of the bank's largest shareholder. At today's price of about $4.20 a share, the government would reap a profit of roughly $7 billion on its $25 billion investment. That's a nice paper profit, especially when put against Britain's hefty bank investments, which remain in the red.
Suppose it is 2011 and the Volcker Act has recently passed, sharply curtailing U.S. banks' riskier activities and separating them from retail deposits. Citi's recently arrived chief executive Bob Steel, who is dismantling the group, puts out a memo to the bank's staff saying Tim Geithner has been hired as head of the bank's strategy and investor relations. Oddly, the imaginary scenario is not such a stretch.
From: Bob Steel
To: All Citi staff
Feb. 1, 2011
Dear Citi employee,
By now, most of you probably know that Citi announced the appointment of Timothy F. Geithner as Global Head of Strategy and Investor Relations. Tim, who joins after a hiatus from a distinguished career in public service, will report directly to me.
In his new role, Tim will oversee Citi's relations with shareholders, including the U.S. government and key investors in the Gulf Region. He will work closely with me, as well as Vice Chairman Christopher Dodd and Executive Vice President of Government Relations Harry Reid to manage the increasingly challenging regulatory environment presented by the implementation of the Volcker Act.
As you all know, we are now focused on developing our client franchise in our core business as we proceed with the series of dramatic changes announced in recent months to the corporate organization of the group. Under Tim's leadership, we will reinforce the confidence we have begun to rebuild with shareholders as we embark on the biggest restructuring of Citi's capital structure since its founding.
Tim is an exceptional communicator and strategic thinker. His track record shows consistent results under some of the most challenging financial conditions in generations. Our new model -- a smaller, more focused global bank for businesses with no consumer operations and a trading arm devoted entirely to facilitating client transactions -- is one Tim understands from his years in public service, both at the Federal Reserve Bank of New York and as Secretary of the Treasury from 2009 until 2010.
Until suitable replacements are named, I have asked Tim to oversee all of our investor relations responsibilities, including those for Citi's two pending spinoffs: the planned divestiture of Citi's North America Consumer Banking franchise to a consortium led by Banco Itau of Brazil and Carlos 'Slim' Helu; and the creation of Toxia, America's biggest non-bank financial institution, through the merger of Citi Holdings and General Electric Capital's GE Money division.
I hope you are all as excited as I am about Tim's arrival and the great future that lies ahead for the corporation. I am looking eagerly to taking your questions in the various Town Hall meetings that our new Head of Corporate Communications David Axelrod will be setting up at Citi locations around the globe in coming weeks.
It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.
Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.
Hard as it may be to believe, shares of beleaguered Citigroup are on fire.
The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.
The over-caffeinated stock maven Jim Cramer keeps calling Citi a "buy, buy, buy" on his nightly CNBC television show. Even the more sober-minded writers at Barron's are pounding the table a bit, predicting Citi shares could double in price in three years."
Sir Win Bischoff appears to relish a challenge. His brief spell as chairman of Citigroup was spent resisting regulators who wanted to break up the bank. If the veteran banker takes over as chairman of Lloyds Banking Group, his first fight will be with competition authorities in Brussels. This is one battle where it would be better if Sir Win did not live up to his name.
Willie Walsh has no incentive to be bullish right now. He has had British Airways on cold rations since joining as chief executive-designate four years ago, and another set of tough union negotiations looms.
The deal may have lifted the bank’s shares, but Sumitomo Mitsui Financial Group is biting off more than it can chew in buying retail brokerage Nikko Cordial and parts of Citigroup’s Japanese investment bank.
LONDON, April 23 (Reuters) – Swiss banking is not dead after all. Just a week after UBS admitted that it would lose 2 billion Swiss francs ($1.71 billion) in the first quarter, its smaller rival Credit Suisse unveils a profit of the same magnitude.
UBS’s entanglements with the Feds suggested Swiss banks, with their confidentiality, fancy products and high fees, were done for. But CS has shown that there is life in the old dog yet.
Some of the outperformance was illusory, as so often the case with investment banks. CS took a 365 million franc gain thanks to the further deterioration in value of its own debt. And there was a further benefit of an estimated 1.3 billion francs thanks to the “market rebound”.
However, the underlying performance was still much better than anyone had expected. CS has won share across many businesses thanks to the forced exit of much of the competition.
In the core private banking division, CS enjoyed a net inflow of 11.4 billion francs. Wealthy Americans seem to recognise that an Obama administration will not turn a blind eye to tax evasion or even avoidance: the U.S. is not high on the source list of funds. UBS clients withdrew 23 billion francs over the same period, so there has been a net loss to the Swiss system, even if not as severe as feared a week ago.
It appears that the rich around the world still value the “geographical diversification” (perhaps political too) and confidentiality that Swiss banks try to offer. Indeed, CS is on a hiring spree in Asia at a time when HSBC, Citigroup, Societe Generale and Barclays have all been shedding private bankers.
Like Goldman Sachs, CS also benefited from more trading and a bigger market share across a range of investment banking markets. CS shone in interest rates, American residential mortgage-backed securities and investment-grade underwriting, among others.
This result looks even more impressive when you consider that it comes at a time when CS has shrunk its balance sheet and also cut the amount of risk it is taking. Quarterly revenues more than tripled against the same period in 2008. However, investors should not read too much into this result. Trading volumes arising from the “market rebound” will surely tumble as some semblance of normality returns.
Moreover, there are signs that the world’s wealthy have learned some hard lessons from the crisis. Customers of investment banks everywhere now know that they were sold complex products simply to generate high fees for the banks.
CS revealed that clients had shifted out of securities into cash. Moreover, within their securities portfolios, its rich customers had reduced their holdings of “managed investment products”. Their holdings of structured derivatives products are languishing at half their peak levels and are unlikely to rise.
All of this translates into lower recurring commissions and fees. CS has responded with “more transparent, liquid and efficient solutions” — probably code for higher management fees. Making these stick if the products and pricing really are transparent may however be as tough a sell as a CDO these days.
LONDON, April 23 (Reuters) – Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.
This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.
The week starting March 29 was the busiest of the year in terms of deals announced, with 821 transactions, and the 5th busiest since Sept. 2008, according to Thomson Reuters data.
There are still some complications (the disappearance of loan-funding, equity market volatility to name just two), but investors seem to be back on the hunt for bargains.
M&A deals may tend to be pretty hit and miss (indeed the failure rate is high) but historically the best returns from deals have been achieved on those struck during economic downturns, when activity is low.
True, M&A has been fuelled so far this year by a spate of large deals in the pharmaceuticals sector, an area that has been least affected by the crunch, with healthcare accounting for 27 percent of the total of $472 billion of announced deals during Q1. Pfizer’s <PFE.N> $68 billion acquisition of Wyeth <WYE.N> and Merck’s <MRK.N> $41 billion takeover of Schering-Plough <SGP.N> were the blockbusters.
But this was only just ahead of the distressed financials sector at 25 percent. And it is this area of activity which will grab a significant share of deals (by volume if not by value) as banks, insurers and fund management companies rejig their portfolios and vulture investors pick off the walking wounded.
The restructurings resulting from the meltdown in financial services are just getting underway. Look at the businesses UBS <UBSN.VX> is selling, Barclays’ <BARC.L> disposal of iShares, or indeed the auctions of Citigroup <C.N> and Royal Bank of Scotland <RBS.L> units in Asia.
Banking groups are under pressure to offload non-core businesses to strengthen weakened balance sheets and therefore are less sensitive to value. Add the assets which governments will have to repackage or offload once they have feel confident they have stabilised the sector and the deal pipeline starts to look positively healthy.
No wonder some investment bankers — especially those in boutiques and which thus have no conflicts with mainstream financial businesses — are rubbing their hands.
The main constraint on buyers (other than those lucky or sensible enough to still be sitting on cash) is obtaining financing. It is possible for companies to raise money for deals that seem to investors to make strategic sense. Roche <ROG.VX> of Switzerland, for instance, tapped the bond markets for a whopping $39 billion to fund its Genentech buy-out.
But stock market investors aren’t flush with cash and are wary of giving companies a free hand. UK’s Pearson <PSON.L> recently had to pull a small share issue that was designed to give it a cash pile from which to make opportunistic acquisitions. Meanwhile, it is still difficult to obtain loan finance from banks, and the bond markets are only really available to larger companies.
Even so, with debt-strapped companies being forced to sell off assets to meet covenants and prices relatively low, there should be plenty of action this year.
– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Edited by David Evans)