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Citibank: Benchmarking Mortgage and Subprime Risk
March 19, 2007

Citibank Goes to Utah: Benchmarking Mortgage and Subprime Risk

Last year, we noted that Citigroup (NYSE:C) was in the process of reducing the number of bank subsidiaries in the group, part of a trend among the largest money centers to streamline and rationalize that has seen large bank holding company ("BHC") peers like JP Morgan Chase (NYSE:JPM) slim down to just three bank units.

One of the telltale indicators that a consolidation has been completed is that the legal domicile of the successor institution has changed. Thus in the case of C lead unit Citibank NA (FDIC# 7213), the bank's legal address has changed from 399 Park Avenue in New York at the end of 2005 to 3900 Paradise Road in beautiful Las Vegas, NV.

Citibank's assets have grown from $706 billion at the end of 2005 to $1.1 trillion due to the fact that five other bank units were rolled-up, including Citibank Delaware, Citicorp Trust NA, Citi (West) FSB, Citibank Texas NA and West NA.

As a result of these mergers, Citibank's individual risk profile has now expanded to include the real estate assets of several former members of the FDICs mortgage specialization peer group, particularly the $121 billion asset Citi (West) FSB. At the end of 2006, real estate loans comprised 43% of Citibank's lending book and 24% of the bank's total assets, this vs. 15% and 8.3%, respectively, the year before. There is no net change for C on a consolidated basis, but for analysts the task of tracking individual loan category performance and building peer groups becomes a bit more labor intensive.

Of interest, now that Citibank has subsumed the mortgage assets of Citi (West) FSB, the weighted average maturity or WAM of the consolidated, bank-only profile for C has increased from 1.6 years at the end of 2005 to 3.7 years at the end of 2006. This change reflects the fact that the Office of Thrift Supervision does not release portfolio or aggregate maturity data for thrifts to the FDIC, even though the data is public. We've been trying to discover why the OTS is so intransigent regarding this key data, but no answer is forthcoming. Perhaps under Basel II OTS will be forced to publicly disclose this data like all other federal regulators.

At 454bp in gross yield, as calculated by the IRA Bank Monitor, real estate is the third most profitable area of lending for Citibank after loans to depository institutions (714bp) and miscellaneous loans (1,410bp), which is usually a euphemism for subprime loans. Indeed, looking at the high gross loan yield for Citibank's miscellaneous loans, which comprise 3.8% of total assets, subprime consumer loans is a pretty good bet.

At 110bp of default in 2006, C has one of the highest bank default rates of any large BHC and just below the 112bp of HSBC Holdings (NYSE:HBC), which recently stumbled due to rising defaults and restatements related to subprime lending at its Household Finance unit. Here's the question of the week: Will C follow in HBC's unhappy footsteps and likewise be forced to restate past period results due to subprime loans?

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