January 15, 2008

Citi's Earnings better than Expected!

If you call a $9.83 loss and $18.1 Billion in write downs better that expected, then sure!

So far Citi's write downs total $24.1 billion or 20% of its book value. But that is not newsworthy, it was expected, actually some analyst called the write downs better than expected as they were expecting figures in the neighborhood of $25 billion for this quarter alone.

The bank also will raise another round of capital of $14.5 billion that will bring total capital raised to $22 billion. This will represent 15% ownership dilution to the bank shareholders. However, you can argue that the dilution is already priced in the stock as it declined by 46% in one year, while the banking index declined 25% for the same period.

Citi also made the right move by cutting its dividend by 41% to $.32 from $.54. That represent a boost to its capital of another $4.5 billion annually. This was a tough call but much needed. I would have rather the bank cut the dividend altogether than raise outside dilutive capital. With a dividend cut you would take a temporary decline in the stock price, but it can recover with a well implemented turnaround plan. However with equity dilution it is permanent.

However the more disappointing news is there was no announcement to their future plans regarding job cuts, assets sales and turnaround plans.

The bank has one of best international assets around but it is big, poorly managed and lacks a vision. If the new CEO can pull a vision to unite banking units and stream operations, the business will be a huge success and shareholders will be rewarded tremendously. So lets wait and see if a turnaround plan will be articulated before investing in Citi.

I hope that Citi has thrown the kitchen sink in this quarter. I am sure that a lot of investors do not want to hear any more write downs or mortgage losses in the future, as it will be very disheartening.

No comments: