I read FT partly to get myself up to speed on the finance most biz majors learn their first year of school. I came across this passage which has several concepts that go over my head.
“But even following the plan to convert preferred shares to common equity, Citi will have $80B of tangible equity versus assets of $2T. With Citi’s consumer bias, that is still worryingly geared.”
This passage concentrates much that I don’t know into a small space. What is the significance of the stock conversion; because it would reduce Citi’s expenses by reducing their dividend payments? Why is the ratio of tangible equity to assets concerning? (I guess I find this puzzling b/c I thought all assets qualify as tangible equity. Is the difference b/n the two the claims against the assets?) Why does the consumer bias of Citi’s services make it more worrying? (By “consumer bias” I presume is meant they emphasize retail services over commercial clients.) Why do they use the qualifier “tangible”? Is this to distinguish it from equity raised through stock issues?
Thanks a million! (And if you’d prefer I break up the questions for more points, just ask.)
Mathew
Kurt
It would help study the financial statements of Citi to understand the break up of the capital employed, which usually consist of:
Ordinary Shareholders equity
Preferred stock
Long term loans
Preferred stock is classified as a long term loan and grouped with other term loans, it measures the gearing of a company. A highly geared company is one which has a larger portion of fixed charge capital compared to ordinary shareholders’ equity.
Conversion option is available when the terms of issue of preferred stock contain a term which allow them to convert a certain portion of preferred stock into ordinary shares.
Please study the conversion rate and the effect of the gearing after conversion to understand the impact.
I think tangible equity refers to ordinary shares. Referring to the statement it means that out of the total assets of $2trillion, Citi will have ordinary equity of $80B and the balance of $120B will represent debt.