Analysts Share In Pessimism About Citicorp

Why are the Feshbachs so bearish on Citicorp?

The first thing they point to is the company's loan portfolio. Nonperforming assets are 1.4 times common equity, and Citicorp's reserve for loan losses is proportionately smaller than the reserves of its peers. That leaves an exceedingly small cushion for further credit problems, says Joe Feshbach.

Furthermore, Citicorp's earnings engine - its consumer bank - is facing heightened competition from other credit-card providers, which is reducing profit margins.

Recession, or the Business

"People are saying it's just the recession," Mr. Feshbach says. "We think it's just the business."

Those views have led the short-sellers to make Citicorp their largest short position among bank stocks, although Mr. Feshbach declines to say how much is riding on it.

Analysts, while not as pessimistic as the Feshbachs, are nevertheless guarded about the company's prospects this year. They think that if the company is forced to cut its dividend again, the stock, now trading at $14.50, could fall to between $10 and $12.

Consensus Is at $1.21

The analysts' consensus is that Citicorp will earn $1.21 a share this year, according to Zacks Investment Research in Chicago.

But some think that will be hard to reach. "They will continue to be behind the eight-ball in terms of capital, which will erode their ability to expand their business and keep their earnings under pressure," says Carole Berger, an analyst at C.J. Lawrence Inc. "I don't have them earning anything this year."

Thomas Jones, Citicorp's chief financial officer, agrees the U.S. credit-card business has gotten more competitive. But the impact on Citicorp will be minimal, he argues, because the company issues cards around the world and profit margins are still healthy elsewhere.

"Ultimately, the folks that do best are the ones with the biggest market share and the best cost structure," he says, adding that Citicorp controls 15% of the Visa and Mastercard market.

Mr. Jones maintains that the company has enough reserves. Although the bank's reserves as a percentage of commercial problem loans, excluding loans to developing countries, is 22.4%, the bank identifies and recovers more nonperforming loans than its competitors and therefore can tolerate a lower reserve level, he says.

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