Citicorp's Assets Rose $7 Billion After Long Slide

After shrinking steadily for nearly a year and a half, Citicorp's assets jumped by a surprising $7 billion in this year's third quarter, to $224 billion.

The rise in assets is significant because it contributed to a decline in Citicorp's capital position.

Some analysts are concerned. "Here they are, trying to raise their capital ratios -- and their assets are going up," said J. Richard Fredericks, an analyst at Montgomery Securities.

Indeed, the $7 billion increase -- coupled with a slight decline in capital -- depressed Citicorp's Tier 1 capital ratio to 3.64%, down from 4.08% three months earlier. Regulators will require a 4% minimum by the end of next year.

Although Citicorp officials declined to comment in any detail, it appears the $7 billion increase was caused in large part by a slowdown in sale of securities backed by credit card loans, home mortgages, and auto loans. According to Securities-Data Co., Citicorp's sales of such asset-backed securities fell by nearly $3 billion in the third quarter, to $1.98 billion.

All other factors being equal, this sales slowdown would explain nearly half of the increase in assets. Put simply, many loans may have remained on Citicorp's books in the third quarter instead of being sold off in securitized form.

One possible explanation: With consumer delinquencies rising, investor demand for asset-backed securities may have been weak.

Citicorp officials brushed aside questions about the $7 billion rise in assets, saying it was an aberration. They refused to provide any precise explanation.

Focus on the Customer

In response to questions about the asset increase, a Citicorp spokesman pointed out that one of the company's chief goals is to focus energies on the customer, "which means you have to be prepared to respond to customer needs." He declined to elaborate.

Allerton G. Smith, an analyst at First Boston Corp., theorized that the asset increase was evidence that Citicorp wanted to build up liquidity to prepare for any possible adverse reaction to its announcement of an $885 million third-quarter loss.

Adding credence to the theory is the fact that Citicorp's periodend assets were $2.4 billion greater than average assets for the quarter. This suggests that much of the increase in assets occurred toward the end of the quarter.

Liquidity in the Picture

"I would speculate it had something to do with making sure enough liquidity was in place for the third-quarter announcement," Mr. Smith said.

Indeed, trading-account assets and investment security assets -- both of which are easily converted into cash -- were up 28% and 23% over the previous quarter.

Of course, Citicorp could have increased its liquidity without increasing assets. It could accomplished this by selling off loans and buying Treasury securities.

But the market for loan sales difficult in the third quarter. Also, Mr. Smith said, selling off assets can be more cumbersome than just taking in more deposits and using them to buy Treasuries.

Deposits Sluggish

Clearly, taking on new deposits does not explain the entire $7 billion increase in assets. Citicorp's deposits in the third period rose only 1%, or about $1.5 billion, to $145.7 billion.

Tanya Azarchs, who covers banks at Standard & Poor's Corp., suggests that Citicorp may have taken on the fresh deposits -- and perhaps even borrowed funds -- as part of an investment play. If the money was invested in Treasuries, for instance, trading profits could be significant if interest rates continue to decline.

If that indeed was the strategy, as it has been at other New York banks, the trading profits could show up in the fourth quarter and bolster Citicorp's capital.

|An Anomaly'

To be sure, some analysts view the $7 billion rise in assets as a mere hiccup. "I think it's an anomally," said Ronald Mandle, an analyst at Sanford C. Bernstein & Co.

He and other analysts expect Citicorp to continue trying to shed assets. A Citicorp spokesman reaffirmed that continued shrinkage through asset sales remains the banking company's long-term strategy.

Magnet for Asset Growth

Whatever the cause for the asset jump, it is not good news for Citicorp. "If your question is: |Does this mean they will have to work double time [to get the figure down],' the answer is |Yes'," said Montgomery Securities' Mr. Fredericks.

Meanwhile, the current quarter may not be the most conducive for shedding assets. Though the company has agreements to sell $1.8 billion of assets from the southern Italian branch system to Banco Ambrosiano Veneto as well as Capital Markets Assurance Corp., which adds $5.3 billion to risk-adjusted assets, the fourth quarter tends to be a magnet for asset growth.

That's because consumers borrow heavily for the Chistmas shopping season, said Lawrence Cohn, an analyst at Paine-Webber Inc. "Customers will charge purchases on their MasterCard or Visa," which will add assets to Citicorp's balance sheet, he said.

Until last quarter, Citicorp's last significant rise in assets occurred in first-quarter 1990, when they grew 1.1% to $233.2 billion. Since then they fell steadily until this year's second quarter, when they flattened out, rising a slight 0.2%. In percentage terms, the third-quarter asset increase was 3%.

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