Bloomberg News reports that Citigroup Inc. (NYSE: C) may need more capital on top of the $7.5 billion it's already gotten from Abu Dhabi. And this announcement has caused Citi stock to fall to a nine-year low of $21.
A few months ago, I posted that Citi would keep dropping and that it might be a buy at $15. It's much closer to that $15 target than it was in December. But in my view, the uncertainty associated with how much more of the structured securities Citi will write off remains very high.
I think that Citi's future depends on how lenient the auditors are. If those auditors force Citi to mark all of its illiquid securities to their current market value, then Citi could run perilously low on capital. According to its 2007 10K, Citi had $133 billion of these illiquid Level 3 assets in December 2007. If auditors deem those worthless, Citi will need to match the write-offs with that much capital.
I'm not sure where Citi will get that much money. So if Citi does hit $15, I may need to set my target price even lower.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.
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Reader Comments (Page 1 of 1)
3-05-2008 @ 1:44PM
Banker24 said...
As posted before. Citi is a sinking ship that has no possibility of coming back to its prime-time status until the higher ups understand that there are a few quick fixes that will help the company. Talks of branch closings and reorganizations have been in the mix for months. But why no action? Why not cust losses now at a time where, in all honesty, Citi can afford to. Selling off new Texas locations as well as Florida, Connecticut, an Mass. Would help to free up capital. Right now each of their new office locations are running in the negative. Over inflated salaries and an utterly insane amount of excess staff, is not helping the situation at all. Average salary base for one office running at their staffing model is around, four hundred to five hundred thousand dollars a year. That is just staff salaries. That is insane. Who can justify spending that much money in one location that is losing money on a monthly basis? Unfortunaly the new CEO does not see that these, so called minor items, can actually help Citi to free up capital. Buy-out leases, lay off employees, sell off deposits, and make a difference.
Citi was once a banking giant, but today is looking more and more like a punch drunk boxer who can't see that he has been beaten.
My predicition Citi will trade below $15 a share by the middle of the second quarter. Also, you will see more and more investors losing confidence if Citi continues to look for hand outs from overseas investors.