In its latest TARP report, Citi (C) disclosed that it has committed only $50.8 billion dollars in lending vs. the $45 billion they received from TARP. The New York Times’ Dealbook in a headline wonders if Citi should be lending more.
Citi’s current leverage ratio, defined as Tier 1 Capital divided by each period’s quarterly adjusted average total assets, was 6.92 per cent, or 14.45 times its current capital base in the second quarter. If Citigroup had leveraged the TARP funds at a conservative 10 times, it could have lent about $450 billion — a far cry from the $50 billion it says it has committed under its TARP lending program.
Two things need to be considered here:
First, let’s judge a bank by how well it performs, broadly, rather than simply looking at how much it lends. We don’t want to bail them out again.
Secondly, if you want to examine the true state of Citi’s leverage in the current market as above, you need to take note of the company’s market cap in addition to its published capitalisation ratios (such as Tier 1 shown above). This is because capitalisation ratios are based on the bank’s reported balance sheet, which is their public assessment of their net worth (ie. their balance sheet) while the market cap gives us a market assessment, of sorts.
The banks themselves aren’t sure what their net worth is, even with privileged access to all the books. They aren’t sure where surprise losses may appear in their loan portfolios since these are unusual times. Thus while reported leverage may look arguably OK, causing some to prod them for more lending, if loan losses end up being worse than expected anywhere in their portfolios, then suddenly we’re in trouble again.
In the stock market Citi shares are trading well below their book value. The market has little confidence in the net worth value used to calculate Citi’s ratios. We’ll venture to say that Citi management also probably doesn’t have much confidence in their ratios either, given their conservatism, despite these presented ratios being their best estimation.
Given the uncertainty still surrounding bank balance sheets, and since we’re past the complete credit freeze-up, going forward we should aim for steady, responsible lending not just lending of any kind. Banks being conservative with their balance sheets is a good thing.
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