Moody’s, Euro Concerns Weigh on Citi & Bank Stocks

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Shares of most of the major banks took a hit earlier in the week after Moody’s announced that it could downgrade the credit ratings of all EU nations early next year. [1] The credit rating agency also gave French banks a negative outlook and downgraded several Spanish banks. Moreover, Federal Reserve officials decided to maintain the status quo at their meeting on Tuesday – quashing any hopes that the Fed will provide another round of monetary stimulus to the U.S. economy. [2] European stocks were hit the hardest with Barclays (NYSE:BCS) trading off by 5% while U.S. banks shed about 2% of their value on average. Citigroup’s (NYSE:C) shares were cushioned initially by news about the bank’s successful sale of its Primerica stake and about the commencement of its downsizing process. However on Wednesday Citi traded down in sympathy with financials about 3% amid rising concerns of the euro and a recession in the Euro zone.

We maintain a $35 price estimate for Citigroup’s stock and believe that the 30% premium can be attributed to the widespread pessimism among investors toward the stock market in general and bank stocks in particular in the wake of the deteriorating European debt crisis.

See our full analysis of Citi

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Moody’s Couldn’t Let S&P Have All the Fun

In what is beginning to look like a game of one-upmanship among the global credit rating agencies, Moody’s declared that it might downgrade the credit ratings of all nations constituting the European Union in the first quarter of 2012. The move comes within a week of rival Standard & Poor’s (S&P) putting 15 EU nations on its watchlist for a possible downgrade (See Financial Stocks Hold On to Gains Despite S&P EU Warning).

Moody’s based its decision to review the nations’ credit ratings on the fact that the recently concluded EU leaders summit in Brussels did nothing substantial to ease immediate concerns over mounting debt pressure. The summit instead focused on long-term measures that can at best help avoid such crises in the future.

Citi Completes Sale

Citi finalized the sale of the remaining 8.1 million shares it held in Primerica, receiving $180 million in cash and completing its exit from the insurance business it spun-off in March 2010. [3]

The group also started work on the downsizing plans it announced last week. Citi’s filings mentioned that as many as 413 jobs from the proposed 4,500 that will be trimmed over the next few months are based out of New York.

Despite holding up relatively well earlier in the week, shares retreated Wednesday on growing concerns that the leaders in Europe will be unable to contain its debt crisis which led to a slump in the euro and fears that another global economic slowdown might be unavoidable.

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Notes:
  1. Communiqué issued by European policymakers does not relieve pressure on euro area sovereigns, Moody’s Investors Service, Dec 12 2011 []
  2. Fed Sees Economy Gaining But Vulnerable to Big Risks, The Wall Street Journal, Dec 12 2011 []
  3. Citigroup Sells Remaining Primerica Shares for $180 Million, Bloomberg Businessweek, Dec 12 2011 []