Citigroup Faces $5 Billion Hit on Dollar’s Rise

Citigroup Faces $5 Billion Hit as Dollar Rises
Pedestrians walk past the Citigroup Inc. Center building in San Francisco. Photographer: David Paul Morris/Bloomberg

Citigroup Inc.’s book value could take a $3 billion to $5 billion “hit” this quarter as currencies in some of its biggest markets decline against the U.S. dollar, said Charles Peabody of Portales Partners LLC.

The Mexican peso and the Brazilian real are among currencies that have weakened, which could lead to “value destruction” for Citigroup, according to Peabody, an analyst for New York-based Portales who was interviewed today by Tom Keene on “Bloomberg Surveillance.” The bank disputed Peabody’s conclusion in an e-mailed statement.

Citigroup, ranked third by assets among U.S. lenders, relies on developing nations for more than half its profit as Chief Executive Officer Vikram Pandit pushes deeper into regions such as Latin America and Asia. The New York-based bank has an “intense focus on capturing emerging-market trade,” Pandit, 55, told shareholders in a March 9 letter.

Peabody based his comments on a June 18 analysis of Citigroup’s foreign revenues from more than half a dozen “influential geographies” and what they’re worth when converted into dollars from currencies ranging from the British pound and Turkish lira to the Korean won.

There have been “extreme movements” in some of these markets in the second quarter, including the Mexican peso, the Brazilian real, the Indian rupee and the Polish zloty, he wrote. The peso and Turkish lira had the biggest impact on currency translation adjustments in the first quarter, he said, citing Citigroup’s quarterly filings.

Currency Movement

“We know that the extreme volatility that was experienced in several key Citigroup currencies during the month of May 2012 will likely produce a multibillion hit to Citigroup’s book value,” Peabody wrote to clients this week. “The stronger U.S. dollar, a trend we expect to continue into 2013, should present itself as a formidable headwind to the creation of value.”

The currencies have slid as the European debt crisis threatens economic growth and investors flee to the safest assets, which include those denominated in dollars. Other large U.S. lenders such as Bank of America Corp. and Wells Fargo & Co. don’t face the same risks as New York-based Citigroup because they are focused more on domestic markets, Peabody said.

Citigroup had $1.7 billion of currency-related gains in other comprehensive income for the first quarter and $3.52 billion of losses for all of 2011.

Earnings Effect

Because of accounting rules, currency movements won’t reduce Citigroup’s reported net income. Losses or gains on adjustments for foreign exchange appear in “other comprehensive income,” which typically is reported separately from the income statement, said Roman Weil, an accounting professor at the University of Chicago Booth School of Business. This affects book value, a measure of the bank’s worth in a theoretical liquidation after liabilities are subtracted from assets.

“It affects shareholders’ equity, it affects shareholders’ wealth,” Weil said. “For a bank, when book value goes down, it means you’re willing to pay less for your share of stock.”

The bank said its operations in emerging markets will create shareholder value, not destroy it. The gross domestic product of such markets should expand by almost 6 percent annually over the next five years, compared with 2 percent for developed markets, Pandit said in March.

Global Impact

“Citi’s unique global footprint and exposure to the higher economic growth regions of the world will drive above-average book value growth over time,” Jon Diat, a Citigroup spokesman, said in an e-mail. “The suggestion that having non-U.S. exposure is somehow detrimental to Citi’s ability to continue to grow value over time is simply wrong.”

Peabody changed his rating on Citigroup shares to sell from buy in March. The bank is a “value trap” with no likely shareholder return in 2012, he said. He has predicted a global slowdown this year and a recession in 2013. Only four other analysts tracked by Bloomberg have sell ratings on Citigroup, with 21 recommending purchase.

Some of the most important swings have happened with currencies in Latin America, where Pandit boosted retail loans by 21 percent to $26.1 billion at the end of March, Peabody said. The Mexican peso had the biggest decline in May versus the dollar, declining 10.5 percent -- the most since September.

Mexican Holdings

Citigroup’s stake in Mexico was $29.5 billion at the end of 2011, including loans, investment securities and trading assets, according to an annual filing. This is the bank’s third-biggest single concentration of credit risk, the filing shows.

The Turkish lira fell 6.3 percent versus the dollar in May, the most since September. Citigroup forecasters expect the lira to weaken to 1.87 per dollar in the third quarter, compared with the median of 1.81 lira from 22 forecasters in a Bloomberg News survey.

In Brazil, where Citigroup had about $7.9 billion of consumer loans at the end of March, the nation’s real is the worst-performing major currency against the dollar so far this year. It weakened 9.5 percent as the nation’s economy unexpectedly contracted in the first quarter.

In Pandit’s home country of India, where Citigroup has about $7 billion in consumer loans, the rupee declined 6 percent against the dollar in May. That was its worst performance against the greenback since November.

Foreign exchange strategists at Citigroup expect the dollar to maintain its gains against the Brazilian real and the rupee in the third quarter and further its advance against the peso.

The real will trade at 2.02 per dollar in the third quarter, according to Citigroup’s foreign exchange strategists, compared with 2.03 at current levels. The Indian currency will trade at 54.20 per dollar versus 56.33 this month and Mexico’s peso will fetch 14 per dollar compared with 13.7 today, according to the bank.

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