
Citi Dividend Will Remain Elusive
NEW YORK (
) --
Citigroup
(C) - Get Report
shareholders hoping for a dividend raise shouldn't hold their breath.
Last week reports surfaced that the
Federal Reserve
will be offering clarity surrounding requirements for banks to raise their dividends. While analysts tend to agree that the largest banks including
JPMorgan Chase
(JPM) - Get Report
,
Wells Fargo
(WFC) - Get Report
,
U.S. Bancorp
(USB) - Get Report
, and
PNC Financial Services
(PNC) - Get Report
are in the best positions to return capital to shareholders through
increases early next year, Citi has been conspicuously absent from that speculation.
Citi CEO Vikram Pandit |
While analysts say it's commendable that Citi has made strides in shoring up its balance sheet and returning to profitability in the last two years, Citi still has two large restrictions blocking it from raising the dividend.
First, the
Federal Deposit Insurance Corp.
still holds roughly $3 billion in trust-preferred securities, and the U.S. Treasury Department is continuing to slim down its stake of Citi's common stock. Any chance of a dividend raise will likely come after the government is made whole, analysts say.
Citi Shares Struggle as Treasury Exits
The institution is also still grinding through reducing assets in Citi Holdings -- those businesses deemed non-core -- which had $421 billion in assets as of September 30, according to the company.
See
TheStreet's
"While Citigroup has the highest overall capital ratios, we believe capital returns will be delayed until the government has completely sold its remaining stake (we estimate $2.1 billion, or 7%, of shares remaining at year's end) and further clarity around the wind-down of Citi Holdings," writes Goldman Sachs analyst Richard Ramsden in a Nov. 8 research note.
While Citi's capital ratios are strong these days -- Tier-1 Common ratio of 10.33% and a Tier-1 Capital ratio of 12.50% at September 30 -- the bank is still dealing with soured mortgages and credit cards (albeit improved) and other toxic assets. To be sure, other banks are dealing with similar issues, but Citi's troubled past means that they will need to keep capital under lock and key and loan loss reserve levels high until asset quality improves.
"The core profitability of the company has to demonstrate further improvement before management is in any position to think about any aggressive capital management strategy," says Todd Hagerman, an analyst with Collins Stewart.
Citi's capital levels, in absolute terms, are strong but "its risk profile is also quite a bit different," Hagerman says.
With all this talk about which banks will scramble for the dividend door, it goes without saying that some critics believe other banks beyond Citi shouldn't be so quick to start returning capital, particularly with the economy still in flux.
FBR Capital Markets analyst Paul Miller wrote in a Nov. 5 note to clients that given the current economic environment, "we would rather see banks hold on to their capital until economic data, earnings and credit trends improved more."
That being said, investors are eager to hear more about how the Citi plans to eventually redeploy capital, Hagerman adds. "I think the bottom line is they're focused more on improving core profitability," he says. "It's just too soon to think about the buybacks or dividend raises."
Citi CEO Vikram Pandit said during the bank's third-quarter earnings call last month that the bank would consider returning capital to shareholders towards the end of 2011 and into 2012.
"As these Basel rules and calibrations and guidelines become clear, I think it would not be unusual to expect guidance from the regulators for the industry in terms of how they are thinking about dividend policy and return to our shareholders," Pandit said during the October call.
Pandit continued: "I think that ... is going to be the key driving guideline in terms of timing of return
of capital. But as I said, 2011 is going to be a year where a lot of this stuff is going to be determined. And so really 2012 is the year where we think we would be in position to return capital, of course, given any guidance we get from the regulators."
Citi "has done a really good job of setting investors expectations," says Morningstar analyst Jaime Peters. She added that while it's possible the timeframe for any capital return could be moved up somewhat, "will they move it up rapidly? I doubt it."
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Laurie Kulikowski
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