New Delhi: Some of the world’s biggest finance companies, such as Citigroup Inc., which are struggling to shore up finances after suffering record losses on bad investments, including home loans, in the US may do this by selling assets in India, including equities.
“It makes sense to sell proprietary investments when the parent company is in need of capital,” said Ajay Relan, managing partner (regional head) of Citi Venture Capital International (CVCI), a private equity arm of Citigroup. “There would be attempts by most banks to shore up their capital by selling proprietary investments.”
Proprietary investments are those made by banks and finance companies with their own money (as opposed to the money of customers) with the objective of making a profit for themselves. Finance companies in trouble have received billions of dollars in bailout money from sovereign funds and private investors, that have acquired stakes in these firms.
Still, more money would not be unwelcome, especially when it is as significant as the proprietary investments of Citigroup in e-Serve and Polaris Software Lab Ltd in India.
By some estimates, these banks could be holding equities worth $5 billion.
Relan estimated Citigroup India’s proprietary investment at $2 billion. “Citigroup would be keen to exit such investments,” he said, adding that the local managers were yet to be instructed by Citigroup’s investors to cash in.
India’s markets, currently in correction mode—Sensex, the benchmark index of the Bombay Stock Exchange, has lost 15.47% in the past 10 days, and fell 7.41% on Monday—won’t cheer the decision of Citigroup and other finance companies should they choose to do this. That’s because such exits would reverse the flow that helped take the Indian equity market to new highs earlier this month.
Investments made by such finance companies have increased in value, making this an ideal time to exit with hefty gains. The Sensex, which includes 30 equity scrips, has more than tripled in the last five years, mainly buoyed by future expectations of growth in the Indian economy and increased flow of foreign institutional investors (FIIs) into the market.
Going by Monday’s performance of the index, some of the banks and FIIs have probably started cashing out.
The souring of US home loans, loosely called the subprime mortgage crisis, came from bad debts incurred on housing loans given to people with a less-than-optimal credit standing or an inability to repay the financing. As these loans turned bad because of rising interest rates and falling real estate prices in the US, banks holding securities backed by these mortgages were forced to make provisions for losses running into billions.
Some banks, such as Lehman Brothers Holdings Inc., shuttered their subprime-mortgage units and cut jobs.
Citigroup, in particular, grabbed headlines after it incurred a net loss of $9.83 billion in the fourth quarter of 2007, mainly on account of write-downs of $18.1 billion on subprime-related exposure. Its competitor, Merrill Lynch & Co., reported a loss of $10.3 billion in the fourth quarter ended December 2007, driven by a $11.5 billion provision towards subprime mortgages. Another Wall Street bank, Morgan Stanley, has provided a total of $9.4 billion against such bad loans so far.
Faced with such huge losses, some of these finance companies have already started to sell some of their assets in other parts of the world. Merrill sold a substantial part of Merrill Lynch Capital, its commercial vehicle business, to GE Capital on 24 December and part of its insurance business. “We freed up about $2 billion of additional capital through the sale,” said John A. Thain, chairman of the board and chief executive officer of Merrill Lynch, in a conference call with analysts after announcing the company’s fourth quarter results.
Similarly, Citigroup has sold a portion of ReadyCARD, a merchant servicing business in Brazil, and Simplex Investment Advisors, a real estate advisory firm in Japan.
Gary Crittenden, chief financial officer of Citigroup, said in a conference call with analysts: “I think the ones that we have most recently done kind of give you an idea of that,” when asked what would qualify as non-core assets which Citigroup is planning to sell.
In India, Citigroup’s proprietary investments include its holding in Chennai-based software services firm Polaris, where it held around 23%, based on a September 2007 filing with the stock exchange. However, Relan did not give any specific examples of which firms Citi would look to exit.
Just as profits that remain after distributing dividends to shareholders enhance the capital base of banks and finance companies, losses erode their capital.
Banks that have incurred huge losses because of exposure to subprime loans have to bring additional shareholders money to increase their capital adequacy which determines how much money they can lend.
Citigroup has so far raised a total of $12.5 billion of capital from investors that include Singapore Investment Corp. Pte Ltd (GIC), the Kuwait Investment Authority and former Citigroup CEO Sanford I. Weill. Merrill, on its part, has roped in Japan-based Mizuho Corporate Bank, Korean Investment Corp. and Kuwait Investment Authority to raise $6.6 billion.