Citigroup: Financial Loser

NEW YORK ( TheStreet) -- Citigroup ( C) was the loser among the nation's largest banks on Tuesday, with shares sliding 4% to close at $49.95.

Following a rise in the dollar against the Japanese yen over the previous two trading sessions, Portales Partners analyst Charles Peabody on Tuesday warned that Citigroup could lose up to $7 billion in regulatory capital this year if the dollar keeps gaining against yen, the euro and currencies in emerging markets," according to a Bloomberg report. Roughly 60% of Citigroup's earnings came from outside the United States during the first quarter.

The broad indices all ended 1% lower, with investors appearing unsettled after the Bank of Japan said it would continue to purchase assets to expand Japan's monetary base at an annual pace of about 60 trillion yen ($612 billion) to 70 trillion yen, in an effort to reach a 2% inflation target.

The KBW Bank Index ( I:BKX) was down 2% to close at 60.91, with all 24 index components showing declines.

The downward pressure on long-term interest rates in Japan continues to push long-term rates higher in the United States. The market yield on 10-year U.S. Treasury bonds was 2.20% Tuesday afternoon, which was down slightly from the previous session, but up 50 basis points since the end of April.

The Federal Open Market Committee will meet next week and the Federal Reserve appears very likely to keep the short-term federal funds rate in a range of zero to 0.25%. But conflicting remarks among FOMC members, including Fed chairman Ben Bernanke, have investors wondering how soon the central bank will slow down the expansion of its balance sheet.

The Fed has been making monthly purchases of $85 billion in long-term securities since September. The market is anticipating lower levels of bond-buying by pushing the yield on the 10-year bond higher.

Dimon: Good Times Ahead

While some investors fear the eventual end of monetary easing by the Federal Reserve and higher interest rates, JPMorgan Chase ( JPM)CEO James Dimon on Tuesday said the firm was well-positioned for a significant rise in earnings .

Speaking at the Morgan Stanley Financials Conference in New York, Dimon said if the market yield on the 10-year U.S Treasury bonds were to rise by 100 basis points, the bank would make an additional $2 billion, "all else being equal."

The bank's annual earnings could increase by $5 billion if rates were to rise by 300 basis points, Dimon said.

Revisiting Overdrafts

The Consumer Financial Protection Bureau early on Tuesday released a report on bank and credit union checking account overdraft fees "that raises concerns about whether the overdraft costs on consumer checking accounts can be anticipated and avoided."

CFPB director Richard Cordray said in a statement that "consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that overdraft programs at some banks may be increasing consumer costs."

Banks were forced to offer overdraft protection for debit card purchases and ATM withdrawals only to customers opting-in for the service, during 2010. According to the CFPB's study, "consumers who opt in for overdraft coverage end up with more costs and more involuntary account closures."

That is no surprise, since those consumers are overdrawing their accounts and agreeing to pay significant fees. The overdrafts, in effect, become loans, and some bank customers are slow to bring their account balances to positive levels, or never do so, in which case the lender writes off the loan, after making efforts to collect.

"If banks are unable to make money available under this system because the CFPB mandates that they lose money on overdrafts, then the household loses access to this method of funding," wrote Rafferty Capital Markets analyst Richard Bove in a note to clients on Tuesday. "The household must then turn to payday lenders to obtain the needed money. The explicit interest rate here is very high. Thus, the CFPB wants to stop the payday lenders from functioning."

Bove went on to take his viewpoint to its obvious and colorful conclusion: "Assuming the CFPB is successful in meeting its goals it will curtail overdrafts at the big banks and shut down payday lenders. The question is then where will the household get the money it needs to meet short-term obligations. The answer, of course, is through illegal lending operations aka the Mafia."


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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