Citigroup (NYSE:C) has considered reducing the amount of cash it keeps on hand by approximately $35 billion, a move that could help the bank buy higher yielding assets or redeem expensive debt to boost earnings, reported Reuters Wednesday. Here are several reasons why this decision is possible and why it would benefit the financial institution:
The decision reflects a turning tide
Cutting its cash on hand would signal to investors and analysts that Citigroup — which had to be rescued by the United States government three times during the financial crisis — is increasingly confident that the majority of its problems are in the past.
Citigroup now poses a sharp contrast to JPMorgan Chase (NYSE:JPM), which emerged from the financial crisis stronger than any of the other major U.S. banks. During that period, JPMorgan was even called upon by U.S. authorities to help salvage failed financial institutions. It may seem surprising that Citigroup has the ability to reduce its cash levels, given its past, especially when its once-stronger rival has estimated that its capital levels are 17 percent below the amount required by the Basel III levels that will be required by 2019. In recent years, Citigroup has had to be more careful than its competitors because investors and regulators have had less confident in its stability following the crisis. But that opinion has changed as the bank’s fortunes have improved…
The tide is turning, and Citigroup’s change in leadership — replacing Vikram Pandit with Michael Corbat as its chief executive — has played a significant role. Corbat has been “assiduously building bridges with regulators,” noted Reuters. More evidence of the turning tide can be found in the bank’s portfolio; with the U.S. housing market beginning to recover, its bad asset losses are abating.
Improve its bottom line
As Reuters noted, this decision could increase Citigroup’s bottom line by two percent and keep the bank’s lending margins relatively robust despite the fact that its competitors are suffering from the currently low interest rates.
The bank has told analysts to expect strong interest profit margins, despite the industry-wide low rates, and these stable margins will also help the company’s bottom line. Lowering its excess liquidity could save $50 million in interest expenses, an amount equivalent to approximately two percent of its 2013 earnings, as Credit Suisse bank analyst Moshe Orenbuch told the publication. The benefit could be even greater if Citigroup uses the cash to make loans with attractive yields, he added…
Federal Reserve gave Citigroup the go-ahead
Citigroup proved that it had enough liquid assets to cover an approximately 37-day long cash drain, a part of the adverse scenario outlined by the central bank’s stress test, the results of which were were reported at the beginning of March. The bank’s treasurer Eric Aboaf and other executives plan on decreasing that supply to 33 days worth of coverage, or 10 percent more than it is required under the newly instated international rules known as the Basel III liquidity coverage ratio. The stress test suggest that Citigroup is now a safer bank than JPMorgan, and the bank’s liquidity pool reflects that shift.
“In the framework of managing a company efficiently, that would be a good thing to do” over the next year or so, Aboaf told Reuters in an interview.
But while the financial institution may be convinced that lowered cash levels would be beneficial, that decision would leave Citigroup more vulnerable to large swings in markets, and in the global economy cash is critical for staving off bank runs during bad times. “At the moment it is appropriate for Citi to take down their cash, but if we end up with very volatile capital markets and Citi is caught in that, then people will start to question them,” Charles Peabody of Portales Partners, a research firm for institutional investors, told the publication.