Citigroup Inc. (NYSE:C) could lose $7 billion from exchange rate changes, says analyst Charles Peabody, cited by Bloomberg.
Peabody, who heads the research department of Portales Partners LLC, is among only four of 34 analysts surveyed by Bloomberg who recommends investors to sell Citigroup shares. He estimates that the bank could lose between $5 and $7 billion in regulatory capital this year, if the dollar rise against the yen, the euro and other currencies of emerging markets, which provides about half of the bank’s profit. This would be the worst loss from the exchange rate over the past five years, exceeding the $3.5 billion in 2011.
Former CEO of Citigroup Vikram Pandit had expanded bank’s business outside the U.S. to help it recover from the 2008 credit crisis. Peabody, who predicted the collapse of the mortgage market in January 2005, said that the bank’s reliance to foreign revenue is now driven by concern that the global economic slowdown will affect Citigroup more than other rival banks.
“Those currency risks are worth taking if the high-growth prospects are there,” said Peabody, who added: “But if global growth falters, then those risks get magnified and growth doesn’t offset the currency risks.”
Citigroup will advance by about 7% to 55.67% next year, according to the average estimate of 26 analysts surveyed by Bloomberg. While Peabody has not yet published his price target for the Citigroup stock, he said that the shares will drop by 50%. Citi shares had the best performance of the 24 companies included in the KBW Bank Index, jumping by 87% in the last 12 months. The other five major U.S. banks combined index advanced 0.1%, led by JP Morgan with 4.7%.
“Citi appropriately hedges its regulatory capital ratios to mitigate the impact of foreign-exchange rates. It is worth noting that Mr. Peabody made similar predictions around this time last year which later proved to be far off the mark as Citi grew its book value and increased capital ratios in the second quarter of 2012 despite significant currency volatility in the quarter,” said Mark Costiglio, a spokesman for Citigroup. He said that he expects the bank to end 2013 with a Tier 1 common ration of at least 10% under international standards.
In June of 2012, Peabody predicted that Citigroup foreign exchange loss would be between $3 billion and $5 billion, while the Mexican peso and the Brazilian real will fall heavily against the dollar. The bank posted a loss of just under $1.6 billion.
“I was wrong in magnitude but not direction,” he said about his 2012 Citi prediction.
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