A few days ago, we received an email inquiring about investing in Citibank. Honestly, I find it quite difficult to judge the US banks and the financial sector in general and personally would stay away from it. There are many factors that have created such an uncertain environment and I would generally consider a play on Citi or Bank of America as a gamble. The environment is just too difficult to predict, especially in the financial sector. Here a few of the reasons why:
-Accounting methods: There was speculation that much of this crisis had occured because of the changes to force mark-to-market accounting. And the government ended up changing some of those laws in order to help financial institutions. However, the new laws are unclear and it is nearly impossible, even for executives of the company, to know what effect this will have on their earnings in the next few quarters. As well, this has major implications on the capital levels of these instutitions and given their leverage, on the trading they will be required to do to account for those losses.
-Timonthy Geithner has usually been blamed for not being clear about his plan and about the context. But last Sunday, he was very clear in saying that some banks would require further capital. A few banks such as Goldman Sachs and Bank of America have been vocal about their intention to pay back the capital as soon as possible. The same echo has not been heard out of Citi so far and that would be another warning sign in my opinion.
-Because of its huge size and complexity, Citibank becomes difficult and perhaps almost impossible to get a clear picture of which makes it difficult to forecast future earnings. The US government will clearly not let Citi fail but how it would rescue it is far from clear as is the impact on bondholders and shareholders.
Because of those reasons and many others, I would still consider Citibank to be too much of a gamble to qualify as a good investment. If you do not have time to visit a casino though, Citi might be a good shot at fortune!If you liked this post, you can consider subscribing to our free newsletters here