Is Citi Preparing To Underwrite The Upcoming Bank Of America TARP-Repayment $45 Billion Equity Offering?

Remember Citi? The bank that once did stuff like investment banking and research, sales and trading, and some other things, and was a little more than just a zombifying and rapidly decaying ward of the state? Neither do we. For a vivid example of how things have changed, Citi today's added BAC stock to its "top picks live" list... and nobody gave a rat's ass. In fact the action in financial stocks was driven more by Dick Bove's earlier downgrade of some regional banks, dragging down such "opportunity" firms as Bank of America with them. Yet Citi knows a thing or two about a thing or two, specifically that BofA, once it is done with all the assorted litigation facing its soon to be ex-CEO, and any potential legal dangers over that other orange guy they got for a steal when they acquired Countrywide, will need to raise capital, especially if its star traders want to be paid for churning the bejeezus out of stocks like Citi, CIT, FNM and FRE (and maybe BAC itself). The amount of the offering will have to be at least $45,000,000,000.99, in order to pay back the $45 billion of government TARP aid still on the books, and the token $0.99 for General Corporate Purposes.

Which is why Keith Horowitz, CFA has decided to take matters into his own hands, sending out the following note to clients "Selloff in BAC Creates Opportunity – Adding to Top Picks Live." Judging by the stock reaction, Mr. Horowitz must have triggered quite a few spam filters.

From the Citi report:

Pay Czar leading to concerns about accelerate TARP repayment — With recent press about compensation curbs, there is heightened concern that BAC will want to accelerate repayment of TARP to defend its capital markets business (this is less of an issue for regionals with more traditional bank business mixes), which is leading to fears of a capital raise. Given the ongoing CEO search, fear of a capital raise only adds to the uncertainty hitting the stock, which creates a very attractive entry point. It is important to differentiate that this capital raise would be viewed as offensive since it would be BAC making decision to repay TARP early, as opposed to defensive capital raises in past.

One imagines this is more a "down the road" issue than anything. Mr. Lewis will have his hands full for quite a while to worry about what his successor will get paid, especially if Mr. Bove continues providing much more "less than instantaneous" reporting on the financial industry.

As for what valuation rabbit out of a hat Citi pulled in order to make BAC the Textron quivalent for Goldman Sachs, here is the insight:

Very Attractive Value Even Under Conservative Assumptions on Capital [apparently Citi's word processing department does not really care much about capitalization guidelines]— We estimate under a conservative scenario, BAC could issue up to $14 billion of capital – this would bring our $3.50 normalized EPS estimate (see Figure 2 for reconciliation) to $3.15 (assuming an issuance price of $14/sh). Based on current prices and our estimates pro forma for capital raise, BAC is trading at 5x normalized EPS or a full 2-multiple-point discount to the group – despite a scenario that that would put capital ratios well ahead of peers, remove TARP, leave strong liquidity, and significantly less CRE exposure than peers. We continue to see BAC as a very valuable franchise capable of generating 20% plus ROTE. Given current prices represent a very attractive entry point (over 50% potential upside to our target) we are adding BAC to Top Picks Live.

And in case you still are not quite convinced, there's this:

Capital under conservative scenario — In Figure 1, we show our methodology on how we arrive at $14 bil capital raise number. The starting point is our estimate that the government will require banks to be at 10.0% Tier 1 capital ratio, and $14 billion is what we est BAC will needs to bridge the gap, with the resulting Tier 1 common ratio coming in at 7.5%. Note that this adjusts for ~50 bp impact of FAS 166/67 as a result of $30 bil of additional RWA, ~$4 bil in after-tax equity impact from additional loan loss reserves for credit card portfolios coming on balance sheet next year, and loss of $4.3 billion from equity warrants related to TARP in the Sept 30 Tier 1 common ratios.

And just because you asked, here are Figures 1 and 2.

Sarcasm aside, with this brilliant piece of probing analysis, Citi has certainly earned its place if not left, then certainly center on the prospectus in the upcoming BofA $45 billion and $1 equity raise. They sure deserve it: one would think Mr. Horowitz' reputation is worth at least the 1% Citi may earn on the offering. After all, in a market which reacts to a Dick call more than a Citi one, one sure needs to raise the stakes a little here and there. Which begs the question: does one semi-nationalized bank deserve to reap underwriting proceeds from issuing equity for another semi-nationalized bank. Cause you see, the thing is that in addition to $45 billion in TARP, Bank of America is on the hook for an addition $56 billion in governmental Intravenous support, courtesy of various AIG support extensions.

Comments

[Anonymous]

And while we are at it,one might suggest another 300-500 billion capital raise just in case they are forced back to MTM rule. And why not raise the whole three trillion that the fortune(or unfortune for that matter)companies are in the red for?this way we don't have to worry of a market crash anymore,since there will not be a debt overhang on companies necks.No seriously,I think any smart ceo(is there any more of that extremely rare comodities?)will take the opportunity of a back stopped market,a return hungry fund managers who missed the boat,and look for completely wiping out debt off of their balance sheets through private placements. And since most of them has done their insider selling already,they don't have to worry of a consequent drop in their share prices. This way they can sleep much easier at night in case the market decides to head south.

[lizzy36]

by the time i reached.... Judging by the stock reaction, Mr. Horowitz must have triggered quite a few spam filters  i was laughing so hard, i snotted diet pepsi all over my desk (pure class). 

thank you, tyler.

[Anonymous]

This is a general question about all of these questionable companies having the ability to raise money. I read the article on ZH last week about someone's suggestion that the Fed directly buy equities. Is it possible that the Fed has been secretly helping these banks raise money by directly buying or indirectly supplying the money for others to purchase their offerings over the last 6 months. It would make sense in the way of a public relations maneuver. This rally all started with Pandit's announcement that they were going to have a better quarter than expected. The obvious benefit to the FED is that it brings back a sense of stability to the economy when the market is going up. 99% of the people out there think things are better than they were but the 1% that read these blogs know that most things have either gotten worse or at best haven't changed. So the Fed basically transfers TARP secretly to it's own off-balance sheet vehicles which in turn makes it look like the Financials are all good again. I'm simplifying what is probably an incomprehensible tangled web but is it possible for the Fed to pull that off?

[Rainman]

The answer is an enthusiastic booyah yes !!

An un-audited Fed is capable of anything....especially when the financial ship is taking on water in a very high sea with turds floating everywhere.

[Anonymous]

Anony . . . there have been several authors posting similar theories regarding this (including Tyler here on ZH). And I tend to believe it myself; especially since the money inflows in the Dow/S&P does not equate to a corresponding decline (outflow) of Money Market funds where supposedly all the sidlined market cash is sitting. Lastly, too little volume taking place over the last 6-months to believe the market is being investor driven.

This theory also convinces and confirms for me why the Fed is so damned adament about opening up their books for a complete GAO audit. I just hope Ron Paul and Alan Grayson keep pushing . . .

[Rama V]

"apparently Citi's word processing department does not really care much about capitalization guidelines"

Bernanke's Banks have delegated their responsibility and authority for capitalization to MSWord.  In a related story, the treasury has announced the purchase of an open source spell checker and capitalization program for the debt challenged.

[Circumspice]

It is important to differentiate that this capital raise would be viewed as offensive since it would be BAC making decision to repay TARP early, as opposed to defensive capital raises in past.

Wow, what a meaningless distinction. Either way, they're raising capital because their (awesome) business model is threatened.

[Gilgamesh]

Let the equity offerings commence.

So far:

AGNC

VECO

...

[Anonymous]

of course citi's customers get first refusual on this wonderful offer. However I think $7 a share may be pushing it, rather than $14!

[agrotera]

...pro forma should be disallowed just like SPV's...  Proforma is the magic word for shell games, and SPV's are the shells.

[time123]

I would not be surprised, given the BAC upgrade from C.

By the way, Cramer's target on C was $6 some months ago, but I noticed recently that he has been saying $12 by 2012. Maybe he thinks short term upside potential is limited.

I have been hoping for C to move to $7 due to short covering for a while now, but so far it has not happened. Time will tell.

time123

P.S. I get my timing signals at http://invetrics.com

[desk-jockey]

Fannie and Freddie are going away. Mortgages will be traded like commodities on a separate, newly created exchange. Or maybe that's some made-up bullshit.

MERS, blowing up as well...

[snorkeler]

As Irwin said: "Give each other $20.00"

[agrotera]

barney is getting the "resolution authority" ready in case the public finally gets a backbone and doesn't allow the legislators of criminality to give more gifts to the 'toobigtofail'....since the TBTF are already failed and they just wont buy the idea of the sacrosanctity of the beloved blackholebanks for the next round of suck the future out of America for the privately held federal reserves babies, the TBTF which are really BHB (blackholebanks).