Citigroup Leads Banks Lower on Ukraine Concerns

NEW YORK (TheStreet) -- Citigroup (C) was the loser among large-cap U.S. bank stocks on Monday, with shares sliding 2.1% to close at $47.61

The broad indices followed European stocks down, as investors worried over the escalating crisis in the Ukraine and sought to park assets in safe havens. The market yield on 10-year U.S. Treasury bonds was down 5 basis points to $2.60, while gold and oil prices rose.  The KBW Bank index (I:BKX) was down 1.1% to 69.28, with all 24 index components showing declines.

Russian troops have surrounded Ukrainian military bases in Crimea and have demanded the surrender of the Ukrainian forces in Crimea by dawn on Tuesday. Russian stocks were pounded, and the ruble fell to record lows against the dollar and the euro.

What does Russia's aggression in Ukraine mean to investors?

For starters, any type of large-scale military activity, especially in Europe, brings the type of uncertainty that can only be bad for the broad market. Many investors have very short memories, but a quick look at a map of Europe shows just how large and important Ukraine is.

The possibility of Russia moving beyond its stated intention of "protecting" Russian speaking Ukrainian citizens in Crimea, is a frightening prospect to bordering countries, including Poland, Slovakia, Hungary and Romania, that also threw off the yoke of communism a little over two decades ago, before and after the collapse of the Soviet Union.

The United States over the weekend was quick to condemn Russian President Valdimir Putin's decision to invade Crimea, with Secretary of State John Kerry said on Sunday during an interview on ABC's This Week calling the action "a 19th century act in the 21st century that really puts at question Russia's capacity to be within the G-8." Kerry said "it's a distinct possibility" that the U.S. won't show up to the planned G-8 summit in Sochi, Russia, in June.

Kerry alluded to the possibility of sanctions against Russia, or against specific Russian government officials. "Russia may be able to invade Crimea, but in the end Russia will isolate itself. There'll be costs to the economy of Russia, costs to Russian business, costs to Russian individuals. And ultimately, I think, Russia will isolate itself on a global stage that it just spent $60 billion through the Olympics to try to present a different face on," Kerry said.

The European Union on Monday will hold an emergency summit on Thursday to discuss the Ukraine situation, and French Foreign Minister Laurent Fabius threatened punitive measures against Russia, including a boycott of the G-8 summit, if Russia didn't show a willingness to withdraw occupying troops, according to an Associated Press report.

Banks' Exposure

For bank stock investors, there is some concern over exposure in Russia, although RBC Capital Markets analyst Gerard Cassidy called the exposure "rather small" in a client note on Monday.

Citigroup in its annual 10-K filing with the Securities and Exchange Commission on Monday said its aggregate exposure in Russia was $10.3 billion as of Dec. 31. This exposure includes $6.5 billion in wholesale loans, $1.7 billion in retail loans, $1.4 billion in securities and $0.7 billion in trading account assets.

That's the highest level of exposure among the "big six" U.S. banks, which isn't surprising, considering Citi is unique among big U.S. banks, in that most of its revenue and earnings come from outside the country.

During 2013, 71% of core unit Citicorp's 2013 net income was derived from outside the United States.

While $10.3 billion is a large figure, it represents just 0.6% of Citigroup's total assets of $1.880 trillion, and 7.7% of the company's reported $133.412 billion in Basel III Tier 1 capital.

So Citigroup would still have a strong level of capital if it were to take a major loss on its Russian business, but

Bank of America (BAC) in its 10-K on Feb. 25 said its net exposure in Russia totaled $6.722 billion as of Dec. 31. That's just 0.3% of the bank's total assets of $2.102 trillion and 5.5% of the company's reported fully phased-in Basel III Tier 1 capital of $132.315 billion.  Bank of America's shares were down 1.4% to close at $16.30.

JPMorgan Chase (JPM) in its annual filing on Feb. 20 said its exposure in Russia totaled $5.4 billion as of Dec. 31. That comes to 0.2% of the nation's largest bank's total assets of $2.146 trillion, and 3.6% of the company's estimated Basel III Tier 1 capital of $151.202 billion.  JPMorgan's stock was down 1.1% to close at $56.21.

Wells Fargo (WFC) in its 10-K on Feb. 26 said its exposure in Russia totaled $786 million as of Dec. 31, which comes to just 0.05% of the bank's total assets of $1.448 trillion, and 0.6% of its anticipated Basel III Tier 1 common equity of $126.2 billion.  Wells Fargo's shares were down 0.6% to close at $46.15.

Goldman Sachs (GS) and Morgan Stanley (MS) both had little enough exposure in Russia for the exposure not to be listed in their 10-K reports. The threshold for the reporting is 0.75% of total assets.

For Citigroup, Bank of America and JPMorgan, the exposure figures are relatively small, but they are big enough to cause some concern, and possibly some write-downs over coming quarters depending on how the crisis in Ukraine plays out.

Analysts on Monday said investors were likely to adjust quickly, following their negative reaction on the first trading day following Russia's aggressive moves in Crimea.

"As the situation regularises, in whichever form that might take, and the world becomes accustomed to the new and/or existing realities, investors are likely to classify the Ukraine-Russia stand-off as 'a local issue'," deVere Group CEO Nigel Green wrote in a note to clients. "Global financial markets will then return to focusing on key fundamentals, such as the improving trend of US economic data, than to what is happening in Ukraine."

Then again, there's a lot of money at stake, because of the number of pipelines carrying natural gas from Russia through the Ukraine to Western Europe, and there's no predicting what disruption to the flow of gas may be caused by Russia's actions.

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-- 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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