This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Citi Leads Banks Lower as Fed Tapers More

NEW YORK (TheStreet) -- Citigroup (C - Get Report) was the loser among bit U.S. banks on Wednesday, with shares sliding 3% to $48.11, following a high-profile downgrade of the stock.

Rafferty Capital Markets analyst Richard Bove on Wednesday cut his rating on Citigroup all the way to "buy" from "sell," while lowering his price target for the shares to $44.50 from $57.00. Bove in a note to clients wrote that previous "buy" recommendation was based on Citigroup trading below tangible book value, but that "Citigroup's book value can [no longer] be trusted," because of the company's exposure to troubled emerging market economies.

"When a currency problem arises in multiple countries worldwide that forces dramatic changes in interest rates... banks suffer. Business in those countries weakens. Citigroup is the only U.S. based bank that is vulnerable to those trends," Bove wrote.

Citi is indeed unique among large U.S. banks, because most of its earnings are derived from business being done outside the United States. For Citi's core unit Citicorp, 57% of fourth-quarter adjusted revenue came from outside the United States, excluding credit and debit valuation adjustments (CVA and DVA) and minority investments. On a similar basis, also excluding a credit card divestiture, 69% of Citicorp's fourth-quarter earnings came from outside the U.S.

Must Read: Bank of America Leads Sector Higher on Mixed Economic Data

KBW analyst Fred Cannon in a client note on Friday wrote that Citi's exposure to Argentina was "manageable," and estimated that even in the worst-case scenario of a full write-down of the bank's business in that country, the hit to Citi's tangible book value would only be 45 cents a share.  That's less than 1% of Citi's reported Dec. 30 tangible book value of $55.38.

But Bove wrote, "The issues arising in a number of foreign nations suggest that loan quality at Citigroup may erode. The bank was the only one I follow that showed weaker loan quality in the fourth quarter and the problems here may accelerate."

These troubled emerging economies include Turkey, whose central bank on Tuesday raised its overnight lending rate to 12% from 7.75%, in an effort to defend its currency.  Other troubled economies cited by Bove in a separate report Tuesday included South Africa, Brazil and Indonesia.

Another "Taper Day"

The broad indices all ended with significant losses and the KBW Bank Index (I:BKX) was down 1.3% to 67.65, with all but one of the 24 index components ending lower. after the Federal Open Market Committee -- as expected by most economists -- announced a further reduction in the Federal Reserve's purchases of long-term bonds.

After completing its two-day policy meeting, the FOMC released its statement, which included some important changes from previous statements which could have spooked stock investors on the prospect of rising interest rates. The FOMC said data it had received since its December meeting indicated "that growth in economic activity picked up in recent quarters," which was an change from the "moderate pace" of growth described in previous statements.

The FOMC also said that despite a recent slowdown in some housing numbers, household spending and spending by business had "advanced more quickly in recent months."

The committee said the Federal Reserve will lower its monthly net purchases of long-term agency mortgage-backed securities to $30 billion from $35 billion, while also lowering its purchases of long-term U.S. Treasury bonds to $35 billion from $45 billion, for total monthly bond purchases of $65 billion beginning in February.

The long anticipated "tapering" of the central bank's "QE3" bond purchases began in December, when the FOMC said January purchases would decline to a total of $75 billion from $85 billion. The Fed had maintained the monthly pace of $85 billion in bond purchases since September 2012.

The media remains fixated on the Fed's monthly bond purchases, and long-term interest rates are expected to rise as a result of the tapering, but the central bank's main policy tool is actually the short-term federal funds rate, which has been locked in a historically low range of zero to 0.25% since late 2008.

The FOMC on Wednesday said it had "reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." The committee also repeated its past statement that the federal funds rate was likely to remain in its current range at least as long as the U.S. unemployment rate remains above 6.5%.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
C $58.46 -0.71%
AAPL $121.30 -0.87%
FB $94.01 -1.26%
GOOG $625.61 -1.10%
TSLA $266.15 -0.24%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs