Citigroup To Benefit From Fed-Endorsed Exit Of Parallel Basel III

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The Fed permitting Citigroup Inc (NYSE:C) to exit parallel Basel III reporting and transition to Basel III advanced approaches clearly amplifies Citigroup’s balance sheet strength, note Credit Suisse analysts.

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse Group AG (ADR) (NYSE:CS) point out that the Fed’s approval would benefit Citigroup Inc (NYSE:C)’s Basel III Tier 1 Common Ratio target by 50 bps.

Citigroup benefits from its ‘capital build’ mode

As reported earlier, Bernstein analysts noted Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) should have the greatest amount of excess capital as a percentage of market caps over the next couple of years. The analysts pointed out that thanks to regulatory requirements towards minimum thresholds through Basel III and CCAR, banks have been in ‘capital build’ mode for the last several years.

As can be deduced from the following table, Bernstein analysts pointed out that with the exception of JPMorgan Chase & Co. (NYSE:JPM), all of the large-cap banks are currently above their estimated Basel III minimum Tier 1 common ratios as of the third quarter of 2013:

Citigroup Estimated Bael III Tier 1 CR

Citigroup’s operational risk RWA to go higher

The Credit Suisse analysts point out the Fed stipulated that Citigroup Inc (NYSE:C) increase its RWA associated with the operational risk by $56 billion (to $288 billion) as of 4Q13 related to its approval. The analysts note given the higher RWA, the estimated Basel III Tier 1 Common Ratio is 10.1% as against the previously reported 10.5%.

The Credit Suisse Group AG (ADR) (NYSE:CS) analysts point out that Citigroup Inc (NYSE:C) had already increased operational risk RWA by roughly $40 billion (~ 50 bps) in 4Q13 related to litigation and the overall operating environment. However, the Fed required an additional true-up to exit the parallel run. The analysts note though the Basel III ratio is negatively impacted by an incremental 40bps, the proforma ratio of 10.1% stands well above Citigroup’s fully-phased in minimum (including G-SIFI buffer) of 9%.

The Credit Suisse Group AG (ADR) (NYSE:CS) analysts note these changes will have no effect on the CCAR submission and anticipate no impact to planned capital actions for 2014.

Citi benefits from reduced B3 T1C target

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse point out that thanks to the Fed’s recent approval, Citigroup Inc (NYSE:C) would be revising its Basel III Tier 1 Common Capital Ratio target from 10% previously to 9.5%. The analysts point out that the target is being reduced given that the previous constraint on capital had been compliance with the supplementary leverage ratio of 5%. However, the analysts note the increase in operational RWA has no effect on the SLR, which stood 5.4% as of 4Q13, which is above the requirement of 5%. Moreover, the revised B3T1C target of 9.5% remains 50 bps above Citigroup’s fully phased-in minimum of 9%.

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse assigned an Outperform rating on Citigroup Inc (NYSE:C) with 12-month target price pegged at $65.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports

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