KBW Suggested to Break Citigroup to Increase Shareholders' Value

By Staff Writer

Mar 22, 2016 11:16 AM EDT

As Citigroup will discuss the breakup issue in the shareholders meeting, an analyst said that will be beneficial for the banks. Breaking up the bank will give the banks easier way to earn acceptable returns. However, shareholders may not believe the analysis.

Analyst at KBW Brian Kleinhanzl as reported by Street Insider was weighing in on the issue. Kleinhanzl believed Citi will be able to improve return of excess capital to shareholders. As in the current capital form, Citi will utilize the deferred tax asset (DTA) over time that will create excess capital.

"We fully believe that regulators are more than comfortable having capital build at the largest banks, and adding G-SIB surcharges into the stress test process will be the next leg up in capital requirements," Kleinhanzl said. "Therefore, if Citigroup management wants to return excess capital after the DTA is utilized and Citi Holdings wound down, then the clearest path to doing so is via a corporate reorganization."

Previously, a small shareholder activist Bartlett Naylor has already stated the issue of breaking up Citigroup. Naylor, a financial policy advocate at the liberal lobbying group Public Citizen has pursued the issues of breaking up the American big banks without success for many years. His main idea is that smaller banks will be easier to manage.

It seems, the issue of breaking up the banks may not be approved by shareholders as Citigroup has shred more than $500 billion asset and pursue to become more efficient and profitable. Nevertheless, in the KBW Bank Index, Citi was recorded as the third-worst performance in stock market, after dropping 16% for this year alone.

Citigroup did not comment on the report, but according to  USA Today, Citi has asked its shareholders to vote against this year's too-big-to-fail proposal. Even so, concerns over the size of Citigroup and other big banks such as Bank of America and others has become hot issue for politicians. Bernie Sanders, a candidate for Democratic nomination even made the issue as his major tenet in 2016 Democratic national convention.

Citigroup opposed the idea of breakup and stated to continue in finding the best long-term outcome for its shareholders. Jennifer Lowney, Citi spokeswoman, said in an e-mailed statement late Monday to Bloomberg, "Citi's board of directors, as part of its fiduciary obligation to shareholders, annually conducts a formal review of Citi's strategy and progress. The board remains confident that the current strategy being executed by the existing management team will yield the best long-term results for shareholders."

As the bank has become bigger, analyst at Keefe, Bruyette & Woods suggested Citigroup to consider breaking up the bank. KBW believed the breakup would increase shareholders value by 57%. On the other hand, Citigroup has stated that the bank will continue to find the best outcome for its shareholders.

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