Citigroup Revises Capital Ratio Target - Analyst Blog

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Citigroup Inc. ( C ) recently lowered the set target for its Basel III Tier 1 common capital ratio from 10% to 9.5%. However, the targeted ratio remains above the minimum requirement by 50 basis points (bps).

Despite dismal performances over the last two quarters, Citigroup continued to maintain healthy capital ratios. Considering this, does the downward revision of the stipulated target indicate anything wrong in the company's financials?

Actually the decline does not indicate deterioration in Citigroup's balance sheet. Instead this follows an approval from the Federal Reserve that allows the bank to adopt Basel III "advanced approach" to estimate its Risk Weighted Assets (RWAs) with effect from second-quarter 2014.

In accordance with the advanced approach, Citigroup has to increase its RWAs from $232 billion to $288 billion. An increase in RWAs will result in a decline in Tier 1 common capital ratios, foreseeing which the bank took the latest action.

The Basel III advanced approach is comparatively more flexible than Basel II standardized approach. So meeting the requirement of overall higher capital ratios will be easier. Though the latest approach requires RWAs to be higher, that should primarily impact the Tier 1 common capital.

Along with Citigroup, other Wall Street biggies like JPMorgan Chase & Co. ( JPM ), The Goldman Sachs Group, Inc. ( GS ), U.S. Bancorp ( USB ) and Morgan Stanley will be resorting to the advanced approach from second-quarter 2014.

As the banks make a transition from Basel II to Basel III framework, we observe relaxation of the regulatory bindings to some extent. However, other mandatory requirements remain the same and these will likely reduce Citigroup's flexibility with respect to its business investments.

At present, Citigroup has a Zacks Rank #5 (Strong Sell). This is because the stock has witnessed significant downward estimate revisions over the last 30 days on the concerns that the low interest rate environment, regulatory issues and litigations will continue to weigh on its financials.

However, the overall situation is not totally bleak. We expect interest rates to improve in the near term on the back of the Fed's continuation of tapering.



CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

US BANCORP (USB): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: C , GS , JPM , USB

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