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.