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Citigroup Inc (C): Strong Currency Headwinds Will Impact Tier 1 Ratio

Citigroup Inc (NYSE:C) is one of the four largest U.S. money center banks, together with Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC).

Citigroup has achieved much since the 2008-2009 banking crisis, including becoming even better diversified regionally, as well as in terms of its line of outstanding banking products and services in all major market segments of consumer and business banking.

Citigroup Inc (NYSE:C)

However, ironically, it is precisely these factors, namely the strong dependency of Citigroup Inc (NYSE:C)‘s sales and profits on international markets and the associated dollar exchange risks associated with this large international exposure, that now create a situation in which Citigroup faces more and stronger risks than its peers.

For example, Wells Fargo & Co (NYSE:WFC), which I reviewed and recommended as a buy, generates a much lower share of its revenue and profit from international markets, being more focused on the domestic U.S. business. Even Bank of America Corp (NYSE:BAC)‘s current short-term volatility caused by the uncertainty surrounding American International Group Inc (NYSE:AIG)‘s objections to the $8. billion Countrywide Financial settlement will probably be short-lived.

On the other hand, I strongly believe Citigroup Inc (NYSE:C) now faces such potential risks that the future price appreciation will be much slower, if there is any price growth for the rest of this year. In any case, the stock is likely to trade in a more volatile fashion for the rest of the year. Here is why:


Major risks Citigroup is facing


1. International markets dependency

Citigroup Inc (NYSE:C)‘s most recent quarterly financial report reveals that it generates almost 54% of its revenues from overseas markets, which are defined as outside of North America; so, even Canada and Mexico are included in the domestic revenue bucket, which represents only 46% of Citigroup’s revenue.

Furthermore, this report for the quarter ending March 31 reveals that net income decreased 14%, primarily reflecting lower revenues, higher expenses and higher effective tax rates on international operations. So, the international operations were a drag on the company’s performance, and are likely to not only continue to negatively impact Citi’s numbers but to do so with even greater intensity, if the recent forecasts for the lower international GDP growth outlook materialize. Some recent individual downward adjustments to individual countries’ growth forecasts, such as those of Germany and China, don’t exactly spell clear skies ahead.

As if the above headwinds were not enough, Citi and other major banks face a slightly lower 2013 U.S. growth forecast of 1.9% from the previous 2.1%.

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