What effect will C issuing billions in new stock have of the stock now held by a small investor?
The news is reporting that C has already issued billions of dollars worth of new preferred stock and is now going to offer billions worth of new common stock.
Best Answer
141 points
gap answered one year ago …
You guys are missing the point altogether...why does Citibank need to come every few days to raise capital?...the answer is that it needs probably over US $ 100 billion to bale it out and it cannot do this ion one tranch or else it will signal a collapse....problem is guessing how much does Citi really need and when it will stop raising funds...it has offered low interest loans to PE Groups and has offloaded some bonds...it's still tough times at Citibank and any raising of capital is not to earn a higher ROE but to fund it's loss...we yet dont know how deep is the hole and every raising exercise creates further doubt and will cause share price to fall
Read more from gapAnswers
364 points
ISIStudios answered one year ago …
It's going to cause every investor - big or small - to be diluted proportionately to their ownership stake and the current market cap of Citi. Right now Citi has a market cap of $132 billion - even if they take on $13 billion in fresh capital, they'll dilute existing shareholders by roughly 9%.
The real issue is how much of the company ends up in "undesirable" hands...these sovereign wealth funds definitely have me a bit nervous. Any thoughts on that?
951 points
Grudun answered one year ago …
But even if Citibank issues enough stock to dilute current holders by 9% there will be a small pop in the stock price after the stock is issued as retail investors who are waiting for a lower price jump in when the think it is at an atractive price.
Read more from Grudun
2183 points
ChaosNantuko answered one year ago …
If their issuing new stock, i'd say that makes the company more attractive, not less. After issuing, you just own a smaller percentage of a bigger entity. The book value per share should still be similar before and after (in fact, if the current share price/issuing price is greater then the current BV/share, then the BV/share actually increases). If the new equity is invested, and makes a return equal to the return on equity so far experienced, the EPS also won't be effected by this development. Given the current unperforming investments most banks have, this new equity may actually end up getting invested at a higher ROE then the current equity, which would increase the EPS. Also, this greatly increases the companies liquidity, as well as makes the credit crunch issue a lot less meaningful for this bank, because it now has some extra cash. We'll see what happens, but i suspect this move is definitely a long term positive decision.
Read more from ChaosNantuko
3963 points
MNSL answered one year ago …
As ChaosNantuko said this is a positive move under the current market condition. Do you know some financial companies are finding difficult to raise capital and about to become bankrupt in some countries. In that sense investors have faith on Citi Bank.
It is true there will be some dilution on stocks. However once they invest this money for profitable ventures it will benefit in the long run.
249 points
engcomp answered one year ago …
I am with gap - this raising of capital isn't for profitable investment, it is to fill a hole made by greedy management. With an equity to assets ratio of 10.45% and assets having gone down in value by more than this ratio, it is easy to see that C and all the other banks are potentially bankrupt.
Read more from engcomp
152 points
happyfeet answered one year ago …
you are all right and wrong on this issue.Short term it s risky and long term it is not.A large country as the U.S will never,at any cost,abandon their main financial institutions such as C, BAC, WFC,ETC...
One day a man was about to lose his house but he had a great idea and didn t lose it. The only thing he did he put a sign on his roof : BANK , and that s how he kept it.Of course some small ,poorly run financials institutions will evaporate but we are talking about a big bank here.But that s what makes a market some sell and some buy depending on their views .I bought shares of C and MS in the last few days and I am just playing the waiting game now.In the meantime I am collecting a nice dividend
