Citigroup Inc (NYSE:C) could lose $5 billion to $7 billion in regulatory capital, if the dollar strengthens against major currencies, including in emerging markets, Charles Peabody predicts.
Charles Peabody’s Feelings For Citigroup
Charles Peabody, who leads research at Portales Partners LLC, feels Citigroup Inc (NYSE:C)’s over 50 percent reliance on revenues from abroad would result in its worst translation loss in five years, exceeding the $3.5 billion deficit posted in 2011.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Peabody feels if global economic slowdown persists, Citigroup Inc (NYSE:C) would be the more affected bank than its U.S. rivals.
The average of 26 analysts polled by Bloomberg predicts Citigroup Inc (NYSE:C)’s stock would rise by about 7 percent to $55.67 within the next year. However, Charles Peabody has a sell rating on Citigroup predicting its share price could fall by 50 percent.
Wrong In Magnitude And Not In Direction
Interestingly Citigroup Inc (NYSE:C) has been the best performer in the 24-company KBW Bank Index (INDEXDJX:BKX) posting over 87 percent growth during the past 12 months, though the other top five U.S. banks could collectively post only 0.1 percent gain.
Charles Peabody also predicted during last June that Citigroup Inc (NYSE:C) could lose $3 billion to $5 billion, on the back of slump in the Mexican peso and Brazilian real against the dollar. However, Citigroup posted $1.6 billion currency loss. Peabody responded by saying he was wrong in magnitude but not in direction.
Emerging market currencies tumbled against the dollar recently amid speculation that the U.S. economy is improving. Indian Rupee touched an all time low yesterday with improved job data emanating from the U.S. Indian Rupee’s fall has also been accentuated on expectations that the U.S. Federal Reserve might curb its asset purchases later this year.
Brutal Pain For Emerging Market Currencies
The Federal Reserve’s buying held down rates and increased investors’ appetite to seek riskier assets with higher yields, such as those in emerging markets. The speculation of U.S. Federal Reserve shifting guard caused investors to sell currencies such as the Mexican peso and the South Korean won resulting in a loss of 6 percent and 2.3 percent respectively of their respective currencies against the U.S. dollar since May.
Citigroup Inc (NYSE:C) has operations spread across 100 countries. Its accumulated currency loss stood at $10.6 billion at the end of March. In case Charles Peabody’s prediction comes true, Citigroup’s cumulative loss including this year could touch a staggering $18 billion.
The currency losses won’t affect the Bank’s reported net income, though its book value would be eroded. Further the impact of currency loss could be felt in capital levels, as the bank includes the gains or losses on foreign currency in Tier 1 capital.
Citigroup Inc (NYSE:C) could seek to reduce or hedge currency losses by taking exposures in futures and forwards. Interestingly according to the bank’s quarterly filing, it held futures and forwards agreement for a notional value of $88 billion at the end of March.
Charles Peabody’s outlook for the dollar is more bullish than foreign-exchange analysts. Recently Bank of America Merrill Lynch in its currency strategy report predicted weakening U.S. currency.
Charles Peabody’s views are respected in the industry as he predicted the mortgage market’s plunge as early as January 2005.