As the Senate report into the London Whale fiasco sheds light on a massaging of valuations and inadequate risk management at JPMorgan, it is Citi that is fast emerging as the new golden child of Wall Street. In March, Citi performed better than JPMorgan and Bank of America in the Federal Reserve’s annual stress test. The Fed’s estimated $55 billion in losses for Citigroup through 2014 in a severe recession were 18% lower than last year’s estimates and well below those of analysts.
Bank of America analyst Erika Penala described Citi’s results in the stress test as “outstanding”, coming in at 34% lower than the Street estimate, and “suggesting a de-risked balance sheet”.
Citi’s announcement in mid-March of capital plans further soothed Wall Street analysts. The Fed-approved planned capital actions including a $1.2 billion common stock buyback programme through the first quarter of 2014. Citi also announced the redemption of trust-preferred securities worth $3 billion.
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Independent trader Josh Arnold says the redemption added “about 1% to 2%” to Citi’s stock price based on the after-tax savings and Citi’s unused deferred tax asset. JPMorgan and Goldman Sachs, on the other hand, are required by the Federal Reserve to submit further plans around their planned capital actions to “address weaknesses”. The abrupt exit of Vikram Pandit raised some concerns, but Citi’s new chief, Mike Corbat, seems to be standing by his word that little about the strategy is going to change other than hacking Citi Holdings a little more.
Business as usual
Certainly within the capital markets division it is business as usual, and Citi’s hard labour over the past few years seems to be paying off.
“It’s a transition in management, not in strategy,” says Tyler Dickson, global head of capital markets origination at Citi. It is something of a heyday for capital markets at present, says Dickson, as loans become more costly and harder to obtain for clients. “We are entering an environment where bank capital is shifting to securities-related capital in the US. Europe and Asia are headed in the same direction.”
In global ECM Citi ended the year second in the league tables, with a market share of 8.3%, compared with just 4.5% in 2010. Year to date, Citi remains in second place to Goldman Sachs in ECM globally and in the US.
“We’d lost momentum in US ECM during the crisis; 2012 was a significant recovery for us. We have re-established ourselves among the bulge-bracket clients,” says Dickson. “In part our recovery has been driven by our client base. Those issuing have been in sectors that play to our strengths. But we also have been very deliberate about making investments in energy and industrials while not losing sight of our strongholds like real estate.”
In DCM, Citi ranks second in the US and fourth globally year-to-date. “Most of the volumes this year are in DCM and investment grade, which has played to our advantage,” says Dickson. He says being global is paying off now more than ever. “An increasing number of emerging markets champions are fitting the investment-grade category, and we have strong relationships in those markets.”
Three advantages
Richard Bove, bank analyst at Rafferty Capital Markets, agrees that Citi finds itself in a good position. “The firm is no longer in survival mode, and it has some advantages,” he says.
“First, no bank has the international reach that Citi does. That gives it access to large corporations. Secondly, the firm has capital again so it can do things in the capital markets that it couldn’t do before. And thirdly, Citi benefits from the instability that is showing up around the world. A number of countries – Venezuela, Argentina, Syria, Cyprus – people there want money in US dollars, and Citi is on the ground there.”
With greater capital to play with, Citi is beginning to become more bullish in leveraged finance. Year to date it ranks third in the league tables for global high-yield bonds and fifth for global leveraged loans. “After the crisis we ran things very tight both with risk and capital. Now other banks are tightening in, while we are feeling better,” says Dickson.
As Citi enjoys its recovered reputation, competitor JPMorgan is showing signs of instability. In addition to the Senate report into the $6.2 billion trading loss and only a yellow light from the Fed on capital actions, it also emerged in March that the Office of the Comptroller of the Currency had downgraded JPMorgan’s management team rating last year because the board might be “insufficient”.
JPMorgan chief executive and chairman Jamie Dimon is also under fire from shareholders for having dual roles.
Over the 12-month period from March 20 2012, Citi’s stock price was up 21% compared with 8.9% at JPMorgan.
