Citigroup Inc. may be the only big bank thinking about a reverse stock split, but the nation's smaller banks are likely considering it.
With many firms suffering massive stock slumps over the past year, investors have been howling for the companies to do something — anything — to reverse the slides.
But Citi's plan to pursue a reverse stock split as part of its pending exchange offer with the Treasury Department, however well intended, may not help and probably would not serve as a role model for the nation's other big banking firms, according to Arthur Hogan, the chief market analyst at Jefferies & Co. That is because companies such as Bank of America Corp., Wells Fargo & Co. and Bank of New York Mellon Corp. are trading at healthier prices or enjoying a rebound. These institutions also do not face highly dilutive transactions, as Citi does with the government.
D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte, said community and regional banks may follow Citi's lead, however, if the markets rebound slowly.
"You don't want to split the stock too early, because it will look really bad if the stock continues to slide," Plath said. "If the market for those banks comes back slowly, which I think it will, you will see a lot of reverse splits" as executives try to improve the looks of share prices.
"You don't want a stock to stay below a buck," he said. "That's embarrassing."
David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, agreed with that assessment.
He said banking companies with depressed stocks will likely consider reverse splits if their shares continue trading below $5 for an extended period.
Many institutional investors avoid trading companies with shares below that price, because the transaction costs are harder to justify when buying and selling cheap stocks.
Investors and analysts say that from Citi's point of view, a reverse stock split is warranted as the company seeks to reduce the number of outstanding shares it would have after completing the conversion. But, they say, reverse splits are often perceived as a sign of weakness and do not change the market value of a company, even though they boost the value of individual shares.
In fact, such transactions sometimes fail to turn around a company's stock.
Thornburg Mortgage Inc. was delisted from the New York Stock Exchange late last year after a reverse split failed to keep its shares above $1. The company said this week that it might file for bankruptcy protection.
Trone said companies that might consider splits include Synovus Financial Corp., Regions Financial Corp. and E-Trade Financial Corp.
Synovus shares fell below $5 on Jan. 22 and dropped 15% Thursday, to $3.07. E-Trade has been trading below $5 a share since Nov. 30, 2007. Its stock fell 11 cents Thursday, to $1.17. Regions has been trading at under $5 since Jan. 20. Its stock fell 12%, to $4.34.
At such levels, "you are a single-digit midget," Trone said. "It's not something that strong companies will do. The stigma is already there — the reverse isn't going to make it any worse. You don't get to be a sub-five-dollar stock if things are going well."
William Smith, the president, chief executive and portfolio manager of Smith Asset Management Inc., said the reverse split could make things "tidier" for Citi by consolidating its outstanding common shares.
Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, wrote in a report issued Wednesday that a split could help Citi by broadening its shareholder base.
"If a reverse stock split occurs, it would likely boost [Citi's] share price to above $5, which might make it easier for institutional investors to buy the shares," Harte said.
Hogan agreed a reverse split may alter the market psychology around Citi's equity.
"Fundamentally, nothing changes, except for the perception of how your stock is doing," he said. "Perception is part of the game. The stock will look more attractive to the average investors."