Citigroup Inc. (C) slashed its stake in India's Housing Development Finance Corp. Ltd. ("HDFC") by 1.5% to 9.9%. This move comes as the company prepares itself to comply with Basel III capital rules before these are implemented. Citi realized a pre-tax profit of approximately $160 million from this stake sale and does not intend to sell any further shares of HDFC.
HDFC, a premier housing finance company of India that was set up in 1977 and reported $37 billion of total assets as of March 31, 2011, is the promoter of HDFC Bank Limited (HDB), one of the largest banks in India. HDFC Bank boasts a retail network of 1,986 branches and 5,471 ATMs in 996 cities as of March 31, 2011.
The stake sale by Citi was not a strategic exercise, but rather an outcome of the capital planning initiative that the company is implementing to satisfy regulatory norms. Regulatory officials around the globe are trying to exercise more flexibility in taking care of the world’s biggest banks with a new set of capital standards, known as Basel III. Banks would be required to set aside additional capital for their investments in financial institutions. This is to dissuade banks from retaining large stake in other financial institutions.
Citi had acquired a less than 10% stake in HDFC in 2006 from its life insurance ally, Standard. Later, Citi further added to its stake in the Indian housing financer. One of the largest foreign banks in India, Citi has 42 full-service Citibank branches in 30 cities and a market share of greater than 20% in credit card spends.
Our Take
The adoption of stricter capital norms are aimed at discouraging banks from indulging in risky activities and foster a strong capital shield so as to avoid another recession. It is also to break the illusion that government would come to rescue big banks from collapsing in the event of a financial crisis, a sentiment that developed across the market following regulatory initiatives to reinstate stability in the financial market post crisis.
We believe that ultimately such efforts would strengthen the overall capital position of the banks, and lead to in fewer bank failures and lesser involvement of taxpayers’ money in bailing them out.
For Citi, we believe that its impressive footprint around the globe would support its earnings.Its core business, Citicorp, remains attractive and credit quality trends appear encouraging. However, the revenue headwind remains a concern. Shrinking of its business through assets sale and the financial reform law will continue to challenge revenue.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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