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?

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.

Citigroup Fourth Quarter is not a Kitchen Sink

Citigroup reported its earnings this morning and the stock is bouncing around like crazy. It was up about $0.50 right after the press release came out and then it tanked and went down as much as 3% to $28. It is now at $28.71.

There will no doubt be much to comment on after the call this morning, but here are a few tidbits from the press release. Most of this is from Schedule B:

1) Citigroup began the quarter with $54.6 billion of "direct Sub-prime Related exposure," and ended the quarter with $37.3 billion. Notice the use of the word "direct." Is there some indirect exposure?

2) Citigroup would have reported exposure of $47.8 billion without the $10.5 billion of hedges that it had during the quarter. Watch counterparty risk on this $10.5 billion.

3) The company recorded a $900 million reserve related to counterparty risk in the quarter. Citigroup cited a FAS 157 adjustment so it is not clear if this was simply an accounting adjustment or actual deterioration in the hedges it has against its portfolio.

4) Total sub prime writedowns of $18.1 billion during the quarter.

5) The remaining portfolio considered "sub prime."

ABCP/CDO $20.6
High grade $4.9
Mezzanine $3.6
ABS CDO-squared $0.2

6) The $20.6 billion of ABCP/CDO or Asset Backed Commercial Paper/ Collateralized Debt Obligations are considered to be level III assets and can't be valued using conventional methods - meaning by observable comparable transactions. This is a large worry for me.

I will have more to say after the conference call.

No More Bloody Shoes

Everyone is waiting for the next "shoe to drop" in the financial markets. No one knows when or what it will be but the market spends an inordinate amount of time thinking and speculating about it. Here is another scenario:

Citigroup, Inc. releases a press release at 2:00 AM on Sunday Morning on Thanksgiving Weekend. It is noteworthy for its simplicity and brevity. It reads:

"Citigroup, Inc., announced this morning that it will no longer provide credit support to the multiple Structured Investment Vehicles that have been carried off balance sheet. While Citigroup, Inc. previously supported these vehicles through various means in order to maintain market stability, the bank is under no legal obligation to do so, and has decided to use our capital for other purposes."

The silence is deafening - for a moment - as the market takes a couple of seconds to digest and understand the implications of this. At the close on Monday, the first money market fund "breaks the buck" and trades at less than a dollar a share. Panic sweeps the staid world of the money markets, accelerated when the great mass of individual investors finally realize that a dollar in a money market fund does not equal a dollar of cash.

How Many Shoes Can We Handle?

Everyone is waiting for the next "shoe to drop" in the financial markets. No one knows when or what it will be but the market spends an inordinate amount of time thinking and speculating about it. Here is another scenario:

Citigroup, Inc., under pressure from the financial markets and shareholders decides to reduce its balance sheet risk, just in case. A memo goes out from the office of the new CEO. Long time commercial bankers call their customers. The conversation goes something like this:

Banker: Hey John. How are things going?

Customer: Oh good. How's the bank?

Banker: Pretty good. The reason I am calling is that the loan that is due next month. We're not going to be able to roll it over this time.

Customer: What?

Banker: Yeah, I'm sorry but I wanted to give you some notice so you can make other arrangements.

Customer: But we have always paid on time. I've had that loan with you for years. That bank was called First National City Bank when I first took it out. You can't do that.

Banker: Well I've got to go. I have some other customers to call. Bye John.

John decides then not to open that new store, or build that building, or expand into that new line of business.

The credit crunch spreads to Main Street.

Citigroup Disclosures

The 10-Q filed by Citigroup yesterday has the following disclosures about the extent of its exposure to the continuing financial mess in the markets:

"On November 4, 2007, the Company announced significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis)."

"Citi also announced that, while significant uncertainty continues to prevail in financial markets, it expects, taking into account maintaining its current dividend level, that its capital ratios will return within the range of targeted levels by the end of the second quarter of 2008. Accordingly, Citi has no plans to reduce its current dividend level."

Breakdown of $55 billion

$11.7 billion of sub-prime related exposures in its lending and structuring business.

*$2.7 billion of CDO warehouse inventory and unsold tranches of ABS CDOs.
*$4.2 billion of actively managed sub-prime loans purchased for resale or securitization at a discount to par primarily in the last six months.
*$4.8 billion of financing transactions with customers secured by sub-prime collateral.

$43 billion of exposures in the most senior tranches (super senior tranches) of collateralized debt obligations which are collateralized by asset-backed securities(ABS CDOs).

*$25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs

*$18 billion of super senior tranches of ABS CDOs as follows:

*$10 billion of high grade ABS CDO.
*$8 billion of mezzanine ABS CDOs.
*$0.2 billion of ABS CDO-squared transactions.

The $18 billion in super senior tranches are being valued apparently using the new level 3 asset guidelines. These securities are not trading at all. There is still significant risk in these holdings due to the uncertainty described below.

"These super senior tranches are not subject to valuation based on observable market transactions. Accordingly, fair value of these super senior exposures is based on estimates about, among other things, future housing prices to predict estimated cash flows, which are then discounted to a present value."

Citigroup Capital Ratios

Here are the relevant capital ratios for Citigroup as detailed in the 10-Q filed this morning. These ratios are for Citigroup. The 10-Q has a second set of capital ratios for Citibank, N.A. The numbers for Citigroup are as of 9/30/07:

Core capital (leverage) ratio 4.13%
Tier 1 risk-based capital ratio 7.31%
Total risk-based capital ratio 10.61%

My assumption is that these capital ratios don't take into account the latest write offs that hit the tape this morning. The 10-Q states that "to be well capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 Capital Ratio of at least 6%, a Total Capital Ratio of at least 10%, and a Leverage Ratio of at least 3%, and not be subject to an FRB directive to maintain higher capital levels."

Here are the actual numbers as of 9/30/07 in billions (add six zeros):

Total Tier 1 Capital $ 92,370
Total Tier 2 Capital $ 41,453
Total Capital (Tier 1 and Tier 2) $ 133,823

Ratio Calculations

Tier 1 risk-based capital ratio of 7.31% is calculated by dividing $92,370 by total Risk-Adjusted Assets of $ 1,261,790.

Total risk-based capital ratio of 10.61% is calculated by dividing $ 133,823 by total Risk-Adjusted Assets of $ 1,261,790.

Core capital (leverage) ratio of 4.13% is calculated by dividing $92,370 by adjusted average assets.