Sovereign wealth fund rescue puts Citigroup in recovery position
Bellwether Citigroup may have plugged the holes in its capital after its unacceptable fourth quarter performance, but how many other financial institutions will show the same resilience?
The carnage at Citigroup was staggering. A $9.8bn fourth quarter net loss following $18.1bn in subprime-related write-downs and a 41% dividend cut. Is there life after such a debacle? With Merrill Lynch posting a similar fourth quarter loss following more than $15bn in asset write-downs and more institutions expected to produce more devastation, the outlook is sombre at best.
But can Citi bounce back again under new management? A leader in a diverse range of global businesses, can Citi assert its traditional leading global role? It is easy to be negative, to follow the bears, but the Citi franchise has much more to offer than subprime and 2007 contained some bright lights as well as some core fundamental mistakes.
Analysts note that international consumer activities were at record levels (revenues up 45%), a turnaround has taken place in domestic credit card services, and investment banking (record advisory and other fees up 43%) and transaction services businesses did quite well.
Bellwether franchise
Citi’s franchise in some ways can be seen as a bellwether for the industry. Bad decisions on subprime and selling out of Saudi Arabia a few years ago, for example, can be rectified at a severe price. But the core businesses roll on with strong business volumes, average deposits up 21% and average loans up 19%, underlining the fourth quarter figures. The Citi franchise of 200 million customer accounts in more than 100 countries may be down but is definitely not out.
And new investors have just backed their confidence in Citi with $22bn in new capital to plug the holes. The role of sovereign wealth funds, Citi’s main new backers, may be debated ad nauseam for months to come, the bank has already made its move and is now ahead of the game. Some analysts believe that the company may even now have excess capital relative to its earlier goals.
The Citi results were clearly unacceptable but, taking a long-term view, the big hit has been taken and sovereign wealth funds from the developing world have moved in to fill the shortfall. The bellwether can hopefully now pick itself up and move on. The big question is how many others will have the same resilience.
