Analysis: Citigroup looks to cut cash holdings to boost earnings

Wed Mar 27, 2013 1:06am EDT
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By David Henry

NEW YORK (Reuters) - Citigroup Inc (C.N: Quote) is considering cutting its cash on hand by about $35 billion, which should help the bank buy higher yielding assets or redeem expensive debt to boost earnings.

Making the change will signal that the management of the third-largest U.S. bank by assets, which had to be rescued three times by the U.S. government in the financial crisis, is increasingly confident that its worst troubles are well behind it.

The move could give a 2 percent boost to Citigroup's bottom line this year and keep the bank's lending margins relatively strong even as competitors suffer from low interest rates.

The bank has enough liquid assets to cover an estimated 37 days of the cash drain expected in a scenario of acute stress under pending new regulations, based on Citi's financial reports through December. Treasurer Eric Aboaf and other executives would like to reduce that to about 33 days of coverage, or 10 percent more than is to be required under the new international rules known as the Basel III liquidity coverage ratio.

"In the framework of managing a company efficiently, that would be a good thing to do" over the next year or so, Aboaf told Reuters in an interview.

While the move would reduce the bank's pool of cash and liquid assets by about 10 percent, Citigroup would still have 10 percent more liquidity than regulators say they will demand. JPMorgan Chase & Co, (JPM.N: Quote) which analysts and investors often see as a stronger bank than Citigroup, is below the pending regulatory minimum.

Citigroup may feel more confident, but the bank is also leaving itself a little more vulnerable to big swings in markets and economies around the world. Cash on hand is critical for staving off runs on the bank during bad times.

The Federal Reserve has not commented publicly on Citigroup's liquidity, but earlier in March it approved the company's capital plan as strong enough to withstand a stress test. The U.S. regulator is part of the international body that has drafted the new liquidity requirement that Citigroup exceeds.   Continued...

The Citibank logo is seen at branch in Washington April 18, 2011. REUTERS/Larry Downing