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Citigroup to Redeem $3B TruPS

Zacks Equity Research

On Friday, Citigroup Inc. (C) announced the redemption of trust preferred securities (TruPS) worth $3 billion. The securities to be redeemed include 7.125% TruPS issued by Citigroup Capital VII, 6.950% TruPS issued by Citigroup Capital VIII, 6.875% enhanced TruPS issued by Citigroup Capital XIV and 6.500% enhanced TruPS issued by Citigroup Capital XV.

Citigroup stated that these preferred securities will be redeemed at $25.00 per redeemed TruPS along with accrued and unpaid distributions until the redemption date arrives. The redemption is scheduled to take place on Apr 16, 2013.

The company’s decision to redeem TruPS follows the Federal Reserve’s approval for the company’s planned capital actions under 2013 Comprehensive Capital Analysis and Review (CCARF).

Along with the request for TruPS redemption, the capital plan included a request for $1.2 billion common stock buyback program through the first quarter of 2014 and the continuation of the current common stock dividend which stands at 1 cent per share. However, buyback of common stock and dividend declaration remains subject to the consent of Citigroup’s board of directors.

The redemption depicts Citigroup’s efforts toward making its funding and capital structure more efficient under Basel III. Notably, beginning 2012, the company has redeemed $9.4 billion of TruPS, including the current redemption.

The planned TruPS redemptions will not affect Citigroup’s Tier 1 common capital and related Tier 1 common ratio, either under Basel I or as estimated under Basel III. Yet, Citigroup’s Basel I Tier 1 capital and its Basel 1 Tier 1 capital ratio are anticipated to reduce by about $3 billion and 30 basis points, respectively.

Apart from Citigroup, many other major banks including Bank of America Corporation (BAC), Wells Fargo & Company (WFC) and U.S. Bancorp (USB) received clearance from the Fed to move ahead with their planned capital actions. The Fed’s approval of capital plans for most of the major U.S. banks reflects stability in the banking system to a great extent. Moreover, such accomplishment for banks will definitely boost shareholders' confidence.

TruPS redemption is viewed as a positive step for the banks, enabling them to bring down interest expenses, as these securities demand higher rates than other securities and often the banks replace TruPS with equity or other low-cost debt. Further, according to the Dodd-Frank Act, banks are no longer allowed to consider these securities as regulatory capital beginning 2013.

Currently, Citigroup retains a Zacks Rank #3 (Hold).

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