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All Is Not Well for Citigroup Inc. (C)

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Citigroup Inc. (NYSE:Cis the third largest bank in the US and also has an extensive global presence. It was also the only large cap bank that failed the stress test in 2012. Owing to this and other reasons, the board at Citigroup appointed a new CEO with hopes that the bank will be able to address all of its outstanding issues. Unfortunately, the situation has not improved much since then and I see headwinds for the bank in the coming future.

Citigroup Inc (NYSE:C)

Is it back on track?

Multiple factors lead to the resignation of former Citigroup CEO Vikram Pandit and the appointment of Michael Corbat. The board and the bank’s investors hoped that the new management would get the bank back on track and that Citigroup would be able to pass the 2013 stress test.

While the bank did pass the most recent stress test, it is still far from coming back on the track. The near future is filled with headwinds for Citigroup. Let’s see how some of the headwinds might affect the bank’s performance.

Competitive edge turning into a disadvantage

Over a third of Citigroup Inc. (NYSE:C)’s earnings come from outside the US. It has the most extensive global footprint among the US large cap banks. In the past, when the US macroeconomic and loans growth was sluggish, Citigroup’s extensive global footprint lead it to report growth in its lending activities. However, now this competitive edge has turned against the bank.

The extensive international presence has led the bank to be exposed to tremendous foreign exchange currency translation risk. Due to this risk, the bank is estimated to lose nearly as much as $1.5 billion, which is 1% of its tangible book value. Since financial stocks trade in proximity to their book values, this could mean a direct depreciation in the company’s stock price.

Other estimates place this figure as high as $7 billion if the dollar gains against euro or other currencies in the emerging markets. If this happens, this could be the worst currency loss for Citigroup is nearly five years. Talks of a quantitative easing unwinding have led the dollar to gain against euro recently, so Citigroup is bound to report currency translation losses this quarter.

The prior year’s estimates put this loss within the range of $3 billion to $5 billion, against which the bank reported a loss of $1.6 billion.

The woes don’t stop here

It seems that Citigroup Inc. (NYSE:C)’s woes don’t end at the translation risk of foreign currency. The bank is also forecasted to report a loss in its book value due to the prevailing higher interest rates environment.

According to estimates by analysts at Credit Suisse, the bank might report a book value decline of around 0.8% this quarter. This is against expectations of 1.1% growth in JPMorgan Chase & Co. (NYSE:JPM)’s book value and 0.2% growth in U.S. Bancorp (NYSE:USB)’s book value.

How the competition is dealing with rising rates

JPMorgan Chase and US Bancorp have the second and third largest market shares in the US home lending markets respectively. The management at both of these banks have confirmed that higher mortgage rates during the current quarter will to increase their revenues.

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