Citigroup Sub Prime Exposure- An Update

Citigroup detailed its remaining "sub-prime related direct exposures in securities and banking, comprised of CDO super senior exposures and lending and structuring exposures" in its first quarter of 2008 earnings release.

CDO Super Senior Exposures

Gross ABS CDO Super Senior Exposures - $33.2 billion.
Hedged Exposures - $10.5 billion.
Net Exposure - $22.7 billion.

The net exposure is broken down as follows:

Asset backed commercial paper - $16.8 billion.
High Grade - $3.8 billion.
Mezzanine - $2.0 billion.
ABS CDO Squared - $0.1 billion.

Lending and Structuring Exposure

CDO warehousing/unsold tranches of ABS CDOs - $0.2 billion.
Sub-prime loans purchased for sale or securitization - $3.6 billion.
Financing transactions secured by sub-prime - $2.6 billion.

Total Lending and Structuring Exposures - $6.4 billion.

A couple of comments:

1) There is still risk in the $10.5 billion in hedges on the portfolio. Counterparty risk is the main problem here.

2) Is the phrase "High Grade" an oxymoron when the securities are valued at 41 cents on the dollar? I mean WTF? (page 19 of the first quarter of 2008 presentation.)

3) I guess the good news is that Citigroup can only write down $22.7 billion more until they are at zero.

Citigroup - Capital Watch

Here are the updated capital ratios for Citigroup for the quarter ending 3/31/2008, after writedowns and adjustments. The data is from the 40 page supplement released with earnings last week.

Tier 1 Capital Ratio - 7.7%

Total Capital Ratio - 11.2%

Leverage Ratio - 4.3%

All three of these capital ratios strengthened slightly from the fourth quarter of 2007 due to significant capital raising by Citigroup.

Book value is at $20.73.

Other tidbits from the quarter:

1) Loans 90+ days past due as a percent of end of period loans is 2.08%. The net credit loss ratio is much higher at 3.82%. I am not sure what the official definition is of this metric. Both these ratios are from the Global Consumer Division - retail distribution.

2) All credit loss ratios moved up sequentially or year over year - the net credit loss ratio in the card division was 5.38%, and in the consumer lending division (real estate) was 1.72%. Loans 90+ days past due was 2.73%.

3) A surprise to me was in the student loan area, where the net credit loss ratio was a scant 0.22%, and loans 90+ days past due was high at 3.25%, but down year over year significantly.

4) U.S. commercial real estate is still holding up, with a net credit loss ratio of 0.37% and loans 90+ days past due of 0.69%. These ratios are up sequentially, but still not in a danger zone yet.

5) The net credit loss ratio in Japan for the quarter for credit cards was at a stunning 14.33%. I am not sure what is going on there, I always thought the Japanese were a thrifty people!!

6) Citigroup is now the proud owner of $1.5 billion in real estate.

I will tackle the bank's remaining exposure to sub prime and related investments in another post.

Citigroup Death Watch

Citigroup filed its 10-K on Friday, and it contained its most recent updated capital ratios. We have written about these ratios previously in this post:

November 5, 2007

Here are the numbers for Citigroup as of 12/31/2007 according to its 10-K. The numbers are in billions, so add six zeros:

Total Tier 1 Capital - $89,226
Total Tier 2 Capital - $44,895
Total Capital (Tier 1 and Tier 2)- $134,121

Ratios

Tier 1 Capital - 7.12%
Total Capital (Tier 1 and Tier 2) - 10.70%
Leverage - 4.03%

Tier 1 risk-based capital ratio of 7.12% is calculated by dividing $89,226 by total Risk-Adjusted Assets of $ 1,253,321.

Total risk-based capital ratio of 10.70% is calculated by dividing $ 134,121 by total Risk-Adjusted Assets of $ 1,253,321.

Core capital (leverage) ratio of 4.03% is calculated by dividing $89,226 by adjusted average assets.

Some things to note -

1) The published 10-K ratios do not include some of the capital raising measures that Citigroup took in late December and January - proforma for that the Tier 1 Capital ratio would be 8.8%, well above regulatory levels.

2) On the flip side to that, there are future write offs coming at the end of the March quarter as well. These writeoffs will impact capital levels.

3) Its total tier one capital declined by only $1.6 billion over one year - fairly surprising considering the losses and write offs they took.

4) An interesting footnote that bears more study - "The impact of including Citigroup’s own credit rating in valuing derivatives and debt carried at fair value upon the adoption of SFAS 157 is excluded from Tier 1 Capital at December 31, 2007."

Does this mean that Citigroup is using monoline insurance ratings of AAA to value some of its capital. If that insurance was excluded then they would have to mark them down?

Dugan Speech

John C. Dugan is the Comptroller of the Currency, and yesterday he gave a speech to the Florida Bankers Association. The Office of the Comptroller of the Currency (OCC) is but one of five regulators of banks in the United States. The five are:

The Office of the Comptroller of the Currency (charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks)

Federal Reserve Board (state chartered banks that are members of the Federal Reserve System and bank holding companies)

Federal Deposit Insurance Corporation (insured state banks that are not members of the Federal Reserve System)

Office of Thrift Supervision (savings and loans)

National Credit Union Administration (credit unions)

Dugan mentioned some interesting information regarding banks and the risks they face.

1) The ratio of commercial real estate loans to capital has nearly doubled in the past six years, to 285 percent.

2) Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital, and almost 30 percent have construction and development loans exceeding 100 percent of capital.

3) Over 60 percent of Florida banks have CRE loans exceeding 300 percent of capital, and more than half have C&D loans exceeding 100 percent of capital.

4) Indeed, during the past year national community banks have experienced a significant increase in nonperforming C&D loans. As of Sept 30, these loans amounted to 1.96 percent of total C&D loans, a rate that was more than twice that of a year earlier.

5) In Florida, that trend is even more pronounced. While nonperforming loans a year ago were 40 basis points less than the national average, the figure has increased to 3.34 percent of total C&D loans. That’s 70 percent greater than the national average and an almost eight-fold increase in one year.

6) Thus far overall nonperforming CRE loans, even in the area of residential construction and development lending, are a long way from approaching historical peaks.

It should be a fun year for the Banking Industry.

JP Morgan vs. Citigroup

If you take a look at the capital ratios of the these two banks, it speaks volumes about what is going on. These numbers are preliminary but here they are:

Citigroup

Tier 1 Capital Ratio - 7.1%
Total Capital Ratio - 10.9%

JP Morgan

Tier 1 Capital Ratio - 8.4%
Total Capital Ratio - 12.6%

You can look up capital ratios for any bank by going to this web site:

http://www2.fdic.gov/idasp/main.asp

The info is always a quarter behind, but it is useful nonetheless to see the trends.

Thrift Capital Ratios

During the last significant recession in the early 1990's the thrift industry was ground zero for everything that was going wrong with the economy at the time, with hundreds of bank failures, etc. This time the problems seems to stem from the "smart money" bankers who have overextended themselves without regard to risk.

The Sept 2007 aggregate thrift financial report shows capital ratios actually getting stronger in September 2007, as measured on a year over year basis.



The full report is here.