Financials Weekly Notes: Citigroup, Deutsche Bank and RBS

The equity market had a roller coaster of a week with a series of mixed economic indicators driving prices in a different direction every day over the period. Investors started the week on a cautious note after Japan reported an unexpected contraction in its economy, but their fears of deterioration in the global economy were quelled to a large extent the same day when the European Central Bank (ECB) reiterated that it will take all steps necessary to ensure economic recovery in Europe. As U.S. manufacturing activity showed signs of an improvement in November after a poor showing last month, and as a survey pointed to improving sentiment in Germany, the market received a boost on Tuesday that sent the S&P 500 to its highest ever intra-day figure. But the trend reversed on Wednesday, when minutes of the Federal Reserve’s meeting held late last month triggered fears of a premature increase in interest rates. ^[1] The equity market recouped its losses on Thursday, however, and closed at a new record high after factory and home resales data indicated further improvement in economic conditions in the U.S.

Bank shares, however, fell out of investor preference over the latter half of the week due to mixed signals about the timing of the Fed’s rate hike. The KBW Bank Index fell almost 1% through Thursday, compared to a 1% gain for the S&P 500 over the same period.

Citigroup

Citigroup (NYSE:C) is reportedly mulling the sale of its index business, Citi Fixed Income Indices. ^[2] Indexes offered by Citigroup are tracked by mutual funds and ETFs managing roughly $174 billion in assets. Although the index business remains lucrative given the steady inflow of funds in indexed funds over recent years, banking giants have been forced to exit the business due to the increased regulatory oversight over issues of transparency and conflict of interest.

Citigroup also appears to be in exclusive talks with Sumitomo Mitsui over the sale of its retail banking business in Japan. ^[3] The sale is expected to close by the end of the year and could bring in around $350 million in cash for the diversified banking group.

• Trefis has a $58 price estimate for Citigroup’s shares, translating into a $176 billion market cap. This is about 10% ahead of the market price between $53-54 seen over the week.
• We estimate the company’s FY 2014 revenues to be around $78.5 billion for an earnings per share of $3.59, compared to a consensus of $3.48 according to Reuters

See our full analysis for Citigroup

Deutsche Bank

Deutsche Bank (NYSE:DB) issued additional Tier 1 capital worth $1.5 billion earlier this week, marking the latest step by the German banking giant to shore up its balance sheet to comply with strict Basel III capital requirements. ^[4] The undated notes issued by the bank include a write-down provision that will allow the bank to cancel them if its capital ratio falls below a pre-determined level in the event of adverse economic conditions.

Deutsche Bank has also decided to stop trading in credit-default swaps (CDS) linked with individual companies, as the bank no longer deems the business profitable. ^[5] The bank will, however, continue to trade in swaps tied to benchmark indexes, emerging-market borrowers as well as distressed companies.

• Trefis has a $41 price estimate for Deutsche Bank’s shares, translating into a $60 billion market cap. This is more than 30% ahead of the market price between $30-31 seen over the week – something we largely attribute to the sharp selling in the bank’s shares over recent weeks following concerns about the bank’s legal overhang.

See our full analysis for Deutsche Bank

RBS

RBS (NYSE:RBS) will pay £56 million ($88 million) to two financial regulators in the U.K. for the meltdown in its IT systems in June-July 2012 which left millions of its customers unable to access their own accounts. ((RBS reaches IT Incident settlement, RBS Press Releases, Nov 20 2014)) The global banking group, which is majority-owned by the British government, will shell out £42 million to the Financial Conduct Authority (FCA) and £14 million to the Prudential Regulation Authority (PRA) over charges that its IT systems were outdated and its internal control system had failures at multiple levels because of which the issue could not be caught or rectified in time.

• Trefis has a $13 price estimate for RBS’s shares, translating into a $41 billion market cap. This is roughly 10% ahead of the market price of around $12 seen over the week.
• We estimate the company’s FY 2014 revenues to be around $32.1 billion for an earnings per share of $0.53, compared to a consensus of $0.64 according to Reuters

See our full analysis for RBS

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1. Minutes of the Federal Open Market Committee, October 28-29, 2014, Federal Reserve Website, Nov 19 2014 [↩]
2. Citigroup considers sale of index business: sources, Reuters, Nov 19 2014 [↩]
3. Citigroup Said to Favor Sumitomo Mitsui to Buy Japan Bank, Bloomberg, Nov 19 2014 [↩]
4. Deutsche Bank successfully completes issuance of Additional Tier 1 capital, Deutsche Bank Press Releases, Nov 19 2014 [↩]
5. Deutsche Bank Scales Back Trading in Credit Derivatives, Bloomberg, Nov 17 2014 [↩]