One day after reports that Citigroup (C) may have weathered the worst of the financial storm, shares of the financial giant were up over 3% in afternoon trading on Wednesday.
Reports of high demand for a $2 billion trust offering were partly responsible for the rise in share price. Also at play was the announcement of plans for Citi to double its staff of private bankers in North American in the next few years.
On Tuesday, Bruce Berkowitz, who manages the $11 billion Fairholme fund was quoted as suggesting that, although problems remain, the worst is over.
Citi also has some of its highest capital ratios in years after the U.S. Treasury and other regulators thoroughly examined its balance sheet. Citi’s widely followed Tier 1 capital ratio, an important measure of the bank’s ability to absorb losses, was 11.7% at the end of 2009. That’s up from about 7% in 2007, before the economic crisis.
But for all the bluster on Capitol Hill, Berkowitz makes a simple counterargument. “The only way the government was going to allow repayment (of TARP) was if they thought the bank was recapitalized.”
With this serving as the “government’s Good Housekeeping seal”, says Berkowitz, Citi shareholders should no longer face large losses from hidden toxic assets.
It also decreases the likelihood of Citi needing to raise more capital from large stock offerings.
Berkowitz is not alone on the Citi bandwagon. Richard Bove, an analyst from Rochdale Securities added his own bullish comments on Wednesday. According to Bove, investors in Citi, who have seen the stock rise around 12 percent in the last 5 days, are likely to make important gains in the long term.
Bove cited the testimony of CEO Vikram Pandit before a congressional panel in charge of overseeing the U.S. government’s rescue of battered financial firms as the most important factor in the stock’s rise over the past few days.
According to Bove, Pandit has separated businesses to keep and businesses to sell, which will increase the value of Citigroup.
“If one is able to separate out the business that they’re going to sell at the moment … the part that’s going to survive has got a 65 cents to 70 cents earning power, which I think is a $7 stock,” said Bove.
During the questioning, Pandit had to address the scope of Citi’s problems which are still in plain view. In the fourth quarter of 2009, the bank announced a $7.6 billion loss and has acknowledged that they are still working to sell off $547 billion in bad assets.
Furthermore, the bank is likely to lose money in the first and probably the second quarter. But Bove still saw the stock as a longer-term investment.
“If we go out two-three years … my view is that the dividend payout ratios in banks are going to go back up to 40 percent and if people were to buy these banks at the present time, they’re looking at extraordinary high yields based on where dividends could be, say, in 2013.”
