Citigroup Inc. (C) is slashing its stake by over a half in Akbank T.A.S., a Turkish bank. The move comes as part of Citi’s capital planning initiatives. However, this would result in the company realizing over a billion in impairment charges in the first quarter of 2012.
Citi had bought 20% equity stake in Akbank in 2007. According to a filing with the SEC, subject to market conditions and approvals, the company intends to cut its stake to below 10%. As a result, Citi will record pre-tax impairment charges of $1.1 billion ($700 million after tax) in the first quarter for its investment in Akbank.
The impairment charges stem from recognizing of net investment foreign currency hedging and translation losses that were earlier recorded in other comprehensive income. In addition, the charges also come from a fall in the carrying value of the total investment to reflect market prices.
Lately, Citi is offloading its stake in a number of foreign banks. In this context, the company has sold its 2.71% equity stake in Shanghai Pudong Development Bank (“SPDB”) for an after-tax gain of around $349 million.
Moreover, Citi has also offloaded its entire 9.85% stake in Housing Development Finance Corporation Ltd. (“HDFC”) in India for an after-tax gain of approximately $722 million. Notably, HDFC is a premier housing finance company of India and the promoter of HDFC Bank Limited (HDB), one of the largest banks in India.
Overall, banks need to boost their capital levels to encounter any financial crisis and satisfy global banking rules. Hence, these stake sales are part of such initiatives to beef up capital levels.
Moreover, Citi has failed to make meaningful return to its shareholders following the financial crisis and this puts the company in the back foot. The recent stress test results were disappointing for Citi. The company could not manage to pass the stress test with its proposed plan to return capital to shareholders. Further, top-line headwind persists at Citi with the continuity of economic weakness and fundamental stress on the banking sector.
However, the company’s efficiency savings and opportunistic investments in global markets are encouraging. We also believe that the strategic capital planning efforts will bear fruit in future for Citi and its shareholders.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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