The US financial services company Citigroup may need to raise as much as $10 billion in new capital, based on leads from the recent stress tests conducted by the US government, said The Wall Street Journal yesterday.
Along with other financial institutions, Citigroup is negotiating with the Federal Reserve to accept the fact that its financial health is sound and in a best-case scenario, the group could have approximately $500 million cushion, more than what the government requires, the Journal reported citing sources.
Earlier this week, the WSJ had reported that after conducting the stress test, the US government found that both Citigroup Inc and Bank of America Corporation may need to raise more capital. (See: Citi, Bank of America told to boost capital: report)
The US government's stress test report is likely to be released on 7 May, which is expected to show that the banks would require raising billions of dollars of extra capital.
The US government had conducted stress tests on 19 major US banks to identify individual strengths of the financial institutions and to see how well they are positioned to ride out the slump.
In the meantime, the Federal Reserve has asked banks to estimate their losses based on several economic scenarios, in which GDP, unemployment and house prices fell by varying amounts.
Banks that have been asked to raise more capital after the stress tests are unlikely to be declared insolvent, but the government may ask certain banks to raise their capital either by selling assets or through private investors.
Yesterday, Citigroup signed a definitive agreement to sell its Japanese brokerage firm Nikko Cordial Securities Inc., the brokerage and underwriting divisions of Nikko Citigroup.
The group said in statement that it was selling its Japanese brokerage unit for $5.5 billion but it will get approximately $2.5 billion after accounting for tax losses and freeing other tied up businesses.
Citi, reeling from $18 billion in losses for 2008 and massive exposure to the consumer loan market, had received $45 billion in US government aid and there were fears that the bank could end up being nationalised, like the American International Group.
But in the first half of this month, the bank reported net income of $1.6 billion in the first quarter of 2009, recording its first profit since the third quarter of 2007. The bank also reported revenues of $24.8 billion, driven by strong performance at the institutional clients group. (See: Citigroup reports $1.6 billion profit, $25 billion revenue in Q1)
Citi said yesterday that with the sale of Nikko Cordial, its pro forma Tier 1 capital ratio for March 31, 2009, has increased by about 27 basis points.