Citicorp May Need $800 Million In Capital to Meet New Standards
Just three months after reaching the minimum capital levels that it had been struggling all year to attain, Citicorp is again behind the capital eight ball.
The bank must raise more than $800 million - or shrink assets even more deeply - within 15 months just to meet minimum standards imposed by international regulators. Several observers said the company will be hard-pressed to meet the deadlines.
Key Role for Expense Cuts
At a meeting with analysts on Wednesday, Citicorp chairman John S. Reed said the company's revenue plans are $700 million behind schedule this year. However, he insisted that the company will meet its goal of generating $2.5 billion of profits "to play with" by the end of 1992. He added that Citicorp has no immediate plans to raise capital on the equity markets.
Instead, he said, "we are going to earn our way there," primarily by cutting expenses. Earnings from the company's consumer banking sector - its prime generator of profits - will fall some $250 million from last year's lofty $1 billion level, Mr. Reed said Wednesday.
Citicorp may thus have no choice but to raise additional expensive capital, some observers said. Its revenue streams are frozen, nonperforming assets continue to grow, and few potential buyers have come forth to bid on its nonstrategic businesses.
Any move to raise more equity would add to the company's debt burden or dilute the shares of current stockholders. In the past nine months, Citicorp has raised more than $1.2 billion in convertible preferred stock in the private placement market.
The new capital problems at the nation's largest bank result from a stunning $885 million third-quarter loss that it reported Tuesday. The deficit reduced Citicorp's Tier 1 capital to 3.64% of assets from 4.08% only three months earlier. Its total capital ratio fell to 7.28% from 8.16%.
A Hobson's Choice
Mr. Reed insisted on Wednesday that the company will attain a 5% Tier 1 capital ratio by the end of 1993. Some analysts questioned whether that goal reflects a one-year postponement of his original plans.
Under international rules that take affect at the end of 1992, banks' ratio of core capital to assets must be 4% while their total capital must be 8%. To get regulatory approval to expand their businesses, banks must be well above minimum levels.
Citicorp has a Hobson's choice when deciding how best to build its ratios. It can either raise new capital or shed more assets. Citicorp's preferred method -- building equity through retained earnings - is apparently out of the question in the current earnings environment. Mr. Reed acknowledged as much in the meeting on Wednesday.
Raising new capital would be difficult because Citicorp's common and preferred stock are trading near record lows. The company's common stock closed Wednesday on the New York Stock Exchange at at $11.625, down $1.125 per share. In the past two days, the stock has dropped $2 from $13.625.
Only time, some observers said, can solve the problem.
"It's a true workout situation," said one investment banker, who asked for anonymity. "There's no one quick fix."
Citicorp is facing obstacles on multiple fronts. The company has been actively shedding assets from its books by selling billions of dollars of credit card receivables and mortgage loans.
But Standard & Poor's Corp. said this week that it is considering downgrading some asset-backed Citicorp issues in light of the bank's third-quarter losses. That would be an unprecedented step in the asset-backed market. Citicorp said in a prepared statement that it is taking steps to restructure the deals so it can retain its AAA credit rating.
Citicorp, meanwhile, further antagonized stockholders by suspending its common stock dividend on Tuesday. The move could save the company more than $300 million annually in equity capital.
Fred Vogelstein in New York contributed to this report.