Thursday, December 17, 2009

Citi repays TARP, Wells Fargo high-fiving itself (C, WFC)

Citigroup (C) announced last Friday that it would go forward with a plan to repay the TARP money it owes the US Government.  As a requirement for this, the US Govt demanded that Citi raise capital elsewhere.  That came in the form of a massive equity offering last night - about $17billion in common stock and $3.5billion in other equity securities.

So much going on here.  Not getting much newstime is the shrewd move by Wells Fargo (WFC) earlier this week.  Upon hearing that Citi was going to spew billions in common stock into an already over-extended stock market, they got out ahead and issued their own shares, allowing them to also pay back TARP money.  They knew there's only so much demand for diluted bank common stock, so they rushed to get their offering out before Citi.  The move paid off incredibly well, as a 5day chart of the two companies shows the lack of demand left for Citi's offering:

As for the Citi offering, there's some positives and some negatives.  The market is generally negative on the deal, seeing it as a move by management to get out from under the government's compensation restrictions.  Investors are furious that Citi may have rushed to get out of TARP, and could have waited to raise capital at higher stock prices.  Whether management had shareholders in mind is a very valid concern.

The positives of course are the removal of the stigma of government dependency, hoping this will improve relations with clients and future employees.  In addition, interest costs are reduced.  And most importantly, the new equity gives Citi even more breathing room on its capital ratios.

The biggest negative is the end of the loss-sharing agreement with the government.  The exposure to severe losses could eat into the new equity capital that has been raised, which would greatly impair future earnings potential:

One shouldn't be surprised to see Citi common stockholders INCENSED at this deal.  Just weeks ago, their presentation made at a Merrill Lynch/BofA conference highlighted the "ring-fenced" assets - or assets that the government would share losses on.  The loss-sharing agreement protected 72% of Citi's auto loans and 94% of their commercial real estate loans -->> and now they're exposed to big losses in these portfolios:

Copyright 2009 AlphaNinja

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