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Virtue of necessity: Capital Cushion

Virtue of necessity: Capital Cushion
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First Published: Wed, Apr 30 2008. 11 18 PM IST
Updated: Wed, Apr 30 2008. 11 18 PM IST
With its latest issue of common stock, set for $3 billion (Rs12,060 crore), Citigroup Inc. will have raised roughly $40 billion in capital since Chuck Prince was ousted as chief executive in early November.
Compared with what’s gone before, and deals such as Royal Bank of Scotland Group Plc.’s $24 billion rights issue, Citi’s move doesn’t seem that big a deal.
“We are issuing common equity at this time as we continue to optimize our capital structure,” said Gary Crittenden, Citi’s chief financial officer.
“We’re pleased with the strong interest we have already received regarding this issuance.”
But a sale that looks opportunistic at something approaching Tuesday’s closing price of just above $26—against a $50-plus share price a year ago—underlines the bank’s need. It may also reveal a new imperative for banks to prove they have as much capital cushion as whichever rival last tapped the markets.
Citi’s target for its tier I ratio of capital to risk-weighted assets is 7.5%, against the 6% viewed by regulators as well-capitalized. But Citi reckons this deal will bring its tier I ratio up to 8.5%. It also still has divestitures in the works, which could lift that further. Of course, it’s prudent to have a buffer against further credit losses in, say, consumer lending, and against reduced flexibility to conduct business off-balance sheet.
Moreover, a dollop of common stock may have been needed to ensure last week’s $6 billion slug of preferred stock all counts as tier I capital under US Federal Reserve rules—which limit the proportion of capital that can comprise certain types of preferred securities rather than common equity.
Big banks do also seem to be overshooting their capital targets, perhaps in an effort, however belated, to make their balance sheets look like fortresses, at least in the context of their peer group.
Deutsche Bank AG, although relatively unscathed by US subprime mortgages, has its issues—but with a 9.2% tier I ratio, regulatory capital hasn’t been one of them.
RBS reckons its equivalent ratio will be above 8% after its rights issue. JPMorgan Chase and Co. sold $6 billion of preferred securities just after reporting an 8.3% tier I ratio.
Crittenden had already said he could “never say never” about further capital-raising. If banks continue to out-capitalize each other, they’ll all be back to ask investors for more money.
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First Published: Wed, Apr 30 2008. 11 18 PM IST