Citigroup Inc (C): Advantage Becoming a Headwind

One analyst estimated that Citigroup Inc (NYSE:C) may lose $5 billion to $7 billion if the dollar gains against the yen, euro and other currencies in emerging markets. You should keep a close eye on it and sell the company’s stock if dollar starts to appreciate. Similarly, global economic downturn would affect Citigroup adversely as compared to its U.S peers because bank operates in more than 100 countries.

What should Citi do?

To survive the foreign currency risk, the bank needs to hold more capital. It does not have one of the most robust capital positions compared to peers, however. More capital will enable the bank to withstand more losses. Let’s look at Citigroup’s capital position, compared to its peers.

At the end of the first quarter, Citigroup reported a Basel 1 Tier 1 capital ratio of 11.6%. In comparison, Wells Fargo and JP Morgan reported Basel 1 Tier 1 capital ratios of 11.8% and 11.6%, respectively.

Under the current risk-based capital regulations, banks are required to hold a certain portion of their total-risk based assets. This portion that the banks hold as capital is known as their core equity capital or the Tier 1 Capital. The Tier 1 capital ratio is the comparison of this core equity capital with the total risk-based assets.

Conclusion

Corbat is moving Citigroup Inc (NYSE:C) in the right direction, but with the downturn of the global economy, an increase in Citigroup’s top line seems difficult in the current quarter. The strengthening of the dollar may not be much trouble for the company’s bottom line, but it will diminish its book value. It is better that investors stay away from Citigroup until concerns regarding the emerging markets are over.

The article Citigroup: Advantage Becoming a Headwind originally appeared on Fool.com and is written by Red Chip.

Red Chip has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc (NYSE:C), JPMorgan Chase & Co., and Wells Fargo. Red is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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