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Bove on Mayo and Citigroup

Rochdale Securities' analyst Richard Bove says he does not believe Credit Agricole's Mike Mayo will change his mind about Citigroup .
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New York (


)-- Rochdale Securities' analyst Richard Bove says he does not believe Credit Agricole's Mike Mayo will change his mind about Citigroup


after he meets with management on October first.

Citigroup management froze Mayo out after he gave negative reviews of the company. Listen to the interview in

this video

or read the Q&A below.

The Street

: Does Citigroup need to write down any losses on deferred tax assets?

Richard Bove

: I don't think so. I think that the IRS, the bank regulators, the company's auditors are all looking at the numbers of Citigroup. Unless you believe that there is some tremendous conspiracy between these organizations to defraud investors by keeping Citigroup's deferred tax assets up, then basically they are properly accounted for. The $50 billion you are talking about here, $19 billion, you know roughly, they have go 7 or 8 years to write off and then the other $31 billion. So I have a lot of trouble believing that they would have to write them down

Then there is an issue that they have to earn $99 billion over the next 10 years if they want to write off all of them. Right? And the fact is even those people who are most negative on Citigroup can see that the company should grow its earnings 33% in 2011 over 2010, and again, using the most negative point of view the company should earn $21 billion in 2010 and 2011. So earning another $76 billion over the next 10 years doesn't seem to be too much of a stretch.

The Street

: So you disagree with Mike Mayo?

Richard Bove

: Yeah, I do because as I say because Mike believes that Citigroup's earnings show the company as having a 33% increase in earnings. Well, if you believe that the company is going to have 33% in earnings, and you also believe that the company is going to write down its deferred tax assets then you must believe that the company is going to have some phenomenal increase in earnings to absorb one and still get the 33% from the other. And again, if he's going to estimate that they are going to earn $21 billion in two years, you know 2010 and 2011, it is pretty hard to assume that in the following 8-10 years that it won't get the remaining $78 billion that they need to utilize these deferred tax assets so I would say his own argument disagrees with Mike Mayo, not me.

The Street

: What are your thoughts on Citi's balance sheet?

First of all Citigroup has I think they have I know they have $180 billion in cash, and I believe they have another $60 billion in securities which are guaranteed by the US government, treasuries or agencies. So what we are talking about is roughly 11%, or one out of every $9 on Citigroup's balance sheet is cash. That is an unusually high number . It is extraordinarily strong and it would suggest that the balance sheet is in very good condition... The company is over capitalized. The company has excess liquidity and that is the basis of growing the earnings at an unusually rapid rate into the future and if people are buying stocks based on what is supposed to happen in the future, as opposed to the


or ancient history then I think Citigroup's balance sheet looks pretty good.

The Street

: Break it down for investors. What should they expect going into earnings?

Richard Bove

: In the third quarter the earnings for all financial companies are going to be pretty weak. In other words, you have got the trading activity has come down dramatically, you have the fact that the loan portfolios are shrinking, you have the fact that margins are not going to expand, the investment banking business has been very weak. So it would be very surprising if any financial company, and that certainly includes Citigroup, shows unusually strong numbers for the quarter. So I think it is pretty clear that this is a throw away quarter for the industry. But I think if you start to go into the fourth quarter you will see a meaningful pickup of M&A activity. So now you are going to see a reduction in reserves because early stage delinquencies are coming down, you will see the expansion of the international business, which is about 60% of Citi Corp., and that expansion will come because those economies outside of the US are not shrinking the way the US economy may be or the difficulties in Europe so you go out a year. I think the earnings are now starting to come in a lot more rapidly. I think you go out a couple of years and the company has gotten rid of Citi Holdings. It has 70 cents a share in earnings from its Citi Corp. or the remaining portions of the company. I think the stock will sell at about 12 times that number , which is roughly $8.50.

The Street

: Do you think that Mike Mayo will sing a different tune after he meets with Citi on October 1?

Richard Bove

: I think he has planted himself so far out on a limb right now that he is going to have to take some time to adjust his perception or the perception of the company he is selling to investors. You know because he has made all of these strident claims about the company. He has questioned the veracity of its accounting. He has questioned the veracity of the people who oversee the company anywhere from the Federal Reserve to the IRS, all the way down to the company's auditors. He has questioned how the company can be managed, which means he has insulted the management. So you can't all of a sudden just walk into the company and say, "Gee, all of a sudden I see the light. Things are all together different, I really want to buy this stock."

--Written by Maria Woehr in New York.

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