Citigroup Faces Basel III Headwinds

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Citigroup (NYSE: C) is a global diversified financial services holding company serving consumers, corporations, governments, and institutions with a broad range of financial products and services.

The company has sailed through another rocky year. Citi posted a decline in revenue for the third and fourth quarters of 2012 in a continuously challenging environment. 

Mixed Financials

Citigroup's fourth quarter earnings missed estimates. The revenues came in at $18.66 billion, down by 4% from the last quarter and 8% below the same quarter in the previous year.

The earnings of the bank reflect the challenging economic environment and regulatory changes. However, it was able to do well in some areas. The bank reached its targeted year end Basel III Tier 1 common ratio. The bank has a liquid balance sheet and high-quality credit portfolio in its core business.

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Citi announced plans to to trim more than 11,000 jobs, seeking to reduce more than 1 billion dollars in expenses from its annual budget. Most of the jobs will be cut from its institutional client group, which has around 1,900 jobs, and from global consumer banking business, which will see job cuts around 6,200 positions.

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Citi, compared to its rivals like JP Morgan Chase, Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC), raised fewer mortgages compared to the corresponding quarter in the previous year, while other banks increased their mortgage origination.

Well Fargo reported record earnings of $5.1 billion in the fourth quarter, up 24% from the last year. The efficiency ratio for the bank increased by 250 basis points to 58.5%. The capital deployment for the bank is expected to increase, and Wells Fargo is well on its way to attaining the top spot in combined deployment next year.

For the fourth quarter, Bank of America’s profit declined by about 63 percent on account of $5 billion of mortgage-related charges. However, the shares have performed well, gaining more than 78% over the last year. As a part of a restructuring plan BAC trimmed its mortgage servicing unit by 3,000 jobs and also shed 6,000, or 35 percent, of its contractors.


Citigroup has recently gone through some abrupt changes. For instance, Vikram Pandit was replaced by Michael Corbat as the CEO of the company. However, despite all the upheavals, the strategy of Citigroup remains unchanged. The new CEO focuses on simplifying the business model and directing its resources towards the core Citicorp franchises, reducing Citi's holdings in an economically viable manner. The company followed the strategy of exiting segments where it felt undersized, and continuing further would be costly. 

Transaction service- continues to give strong signals

The transaction unit of Citigroup operates in approximately 100 countries, and had 400 billion deposits and $75 billion in loans in the third quarter of 2012. The group reaped some benefits due to strong growth in trade finances and looks forward to gaining further ground due to difficulties faced by some other competitors.

The transaction service showed the positive operating leverage in the third quarter of 2012.

BASEL III Relaxation- Boon for Citigroup

The Basel committee on Jan. 7, 2013, announced that it will relax some of the conditions governing the Liquidity Coverage Ratio of banks. Liquid Coverage Ratio is the ratio of high-quality asset of a 30 day net cash outflow. As per the unchanged rules, banks needed to maintain a ratio of more than 100%.  But according to the new rule, a wider definition of High Quality Liquid asset will come into terms and the cash outflow parameters will be reduced.

While all the banks gained from the decision, Citigroup has benefited the most from the revision of the rules. Citigroup, unlike most other banks, has disclosed its LCR of 116%, which under the stricter rule fell short of meeting some requirements.

Citigroup will now be able to divert its money to invest in higher return strategies, rather than having to hold or push the deal into liquid assets. Citigroup, compared to other competitors such as Bank of America, has become more responsive.

According to Buckingham research, the recent change in the Basel III norms may free up approximately $50 billion of cash at Citigroup.


Citigroup has come a long way since it’s downfall (almost) in the sub-prime crisis. The company has made noteworthy progress in restructuring its shattered business, which meant strengthening the balance sheet with improved asset quality, increased capital adequacy, and higher liquidity.

Recently Citigroup, along with 9 other mortgage servicers, agreed to pay a total of $805 billion to arrive at settlement of a U.S. government mandated case-by-case review of the housing crisis foreclosures.

The current headwinds and challenging global environment have undermined the confidence of stakeholders in the market, which is the prime reason why banks are trading at a discount. Citigroup represents a great opportunity for patient and risk bearing investors.

valuewalk has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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