This Day On The Street
Continue to site right-arrow
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
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Citigroup's Business Model Is 'Not Sustainable,' Says Societe Generale

NEW YORK (TheStreet) -- Citigroup's (C - Get Report) business model is "not sustainable in [the] new regulatory era," and the bank needs ramp up its efforts to simplify its operations, according to Societe Generale's equity research team.

The Societe Generale analysts, including Murali Gopal, Andrew Lim and Axel Richard on Friday downgraded Citigroup to a "hold" rating from a "buy" rating, while cutting their price target for the shares to $52 from $58, following the surprising rejection of Citigroup's 2014 capital plan by the Federal Reserve on Monday.

The Fed announced the results of its Comprehensive Capital Analysis and Review (CCAR) on Wednesday. This was the second part of the regulator's annual stress-test process, incorporating banks' submitted plans for capital deployment to the same nine-quarter "severely adverse" economic scenario used in the first part of the stress tests that were concluded the previous week.

Citi passed the first round of stress tests with a minimum Tier 1 capital ratio through the severely adverse scenario of 7.2%, well above the 5.0% required to be considered well-capitalized and pass the tests. For CCAR, the bank submitted a capital plan calling for $6.4 billion in common-share buybacks and an increase in the quarterly dividend to a nickel from a penny. If the bank were to deploy this much capital, its minimum Tier 1 common equity ratio through the severely adverse scenario would be 6.5%, still significantly above the required 5%.

But the Federal Reserve's rejection of Citi's capital plan wasn't based on those numbers. It was based on "qualitative concerns, including the "significantly heightened supervisory expectations for the largest and most complex BHCs in all aspects of capital planning."

The Fed went on to question Citigroup's ability to "project revenue and losses under a stressful scenario for material parts of the firm's global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures." The regulator also said it had previously identified some areas of concern to Citigroup, but had not seen "sufficient improvement" in these areas.

CLSA analyst Mike Mayo in a note to clients Wednesday had some harsh words for the Federal Reserve: "In the new world of Big Brother Banking, the government can make decisions such as this, even if a bank is well above regulatory minimums, allowing a new level of regulatory discretion. The Fed's decision makes it look like there is no level of capital that is sufficient whereby Citi could repurchase stock."

He also wrote that it might be a good time for Citigroup to sell its Banamex unit in Mexico, which recently identified a $400 million fraud that forced the parent company to restate its 2013 earnings.

The Societe Generale analysts delved further into Citigroup's international operations, calling the bank "excessively diversified as beyond Mexico, Brazil, Korea and India no other EM contributed more than 1.5% of total revenues."

"We believe operational/regulatory risks outweigh the upside potential," the Societe Generale analysts added. "In our view, Citi needs to come up with a credible plan to restructure its business model."

With the possibility that Citigroup's revised 2014 capital plan may not include any buybacks or dividend increase, Societe Generale estimates the bank's book value could rise by $24 billion over the next two years. But this may not do much for the stock, according to the analysts, unless the bank begins significant capital deployment. The continued buildup of excess capital will also lower the bank's return on equity.

With so many emerging-market units contributing relatively little, Societe Generale sees a "tremendous opportunity" for Citigroup to simplify its business. Emerging markets the bank might consider exiting include Russia, China, Poland, Indonesia, Turkey, Thailand, the Philippines and Argentina.

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
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

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
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
C $53.06 -0.93%
JPM $60.89 -1.79%
AAPL $126.60 0.15%
FB $80.00 -1.48%
GOOG $567.68 -1.33%

Markets

DOW 17,856.78 -278.94 -1.54%
S&P 500 2,071.26 -29.78 -1.42%
NASDAQ 4,927.37 -55.4390 -1.11%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs