Friday, November 21, 2008

Citi shareholders need reality check

As speculation continues to mount around the future of Citi's various business units, Bob McDowall, a research director with TowerGroup in Europe, remarked that investors needed to understand that banks were a long-term stock pick.

In the last two days, Citi's share price has slumped more than 20% forcing the hand of the bank's board members who are meeting today to discuss options for restoring investors' confidence. Despite talk of an increased injection of capital by Citi's main investor, Prince Alwaleed Bin Talal, Citi's shares continued to fall.

There is speculation that Citi may sell of one or more of its businesses to help shore up capital and investor confidence. Business lines it is likely to consider selling include its investment banking business and special investment vehicles. McDowall said that Citi's global transaction banking, wealth management and international branch network remained relatively good value, so it is unlikely to dispose of those.

But given that now is not a good time to be selling, given low valuations, McDowall said Citi's options were limited. He said governments could not continue to be seen to be pumping money into ailing banks as that would further erode customer and shareholders' confidence in the US financial system.

But McDowall takes a dim view of the pressure shareholders are putting on Citi to deliver more value in the current depressed economic environment. "Shareholders have to understand that banks are a long-term stock peg," he said. "Having had a good feast on banking dividends for the last five years, now it is time for a little bit of famine."

McDowall believes that the much maligned sovereign wealth funds, which have invested in banks like Citi, have a much better attitude towards investing in banking stocks; they tend to take a longer-term view and see the current share price of Citi as an opportunity to buy not sell.

According to a Reuters report, Citi's CEO Vikram Pandit has indicated he wants to hold onto the banks' Smith Barney brokerage business, and said that employees should not focus on Citi's falling share price as it is well capitalised.

A single bank seems likely to take on a merger with a bank of Citi's size - that would be too much to digest, although that may be an option if the government is forced to step in. One also has to wonder whether the US authorities will relax investment restrictions for foreign investors in US banks, given that Middle Eastern investors have demonstrated that they are only too willing to hold stocks like Citi.

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