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A Tale of Two Banks

BofA’s Mantra: We’re Not Citigroup –

Bank of America Corp. [NYSE: BAC] Chief Executive Kenneth Lewis is eager to prove one thing above all else: His company isn’t Citigroup Inc. [NYSE: C]

As shares of big banks have fallen in the face of speculation that they might be nationalized by the government, Mr. Lewis and other executives have mounted a full-court press to differentiate their company from their New York rival.

In a series of internal memorandums to Bank of America managers and in media appearances over the past two weeks, Mr. Lewis has implicitly attacked Citi’s performance. He has repeatedly insisted that Bank of America needs no more government money — while suggesting that Citi probably will — and that fees generated from Bank of America’s base of 59 million retail and small-business customers will allow his bank to “earn” its way out of the crisis.

“We need to help keep these facts straight in the public debate as the market appears to be moving in part based on rumor, innuendo and falsehoods propagated by the misinformed,” Mr. Lewis wrote in a Feb. 20 internal memo. “I see no reason why a company that is profitable, with capital and liquidity levels that are very strong, and that continues to lend actively, should be considered for nationalization.”

Bank of America made $4 billion in 2008, but it lost $1.79 billion in the fourth quarter. Its Tier 1 capital ratio is 9.15%, above regulatory minimums, but another capital ratio known as tangible common equity remains thin at 2.83%. And while the bank did make $115 billion in new loans during the fourth quarter, outstanding loan balances declined 1.2%.

On the other hand, Vikram Pandit, in a memo to Citigroup employees says:

Pandit Memo Cites Citi’s ‘Strengths’ in Time of Crisis –

I believe there are two key issues to focus on — capital strength and earnings power.

First, on capital strength, as you know, the preferred exchange we announced nearly two weeks ago is expected to make Citi the strongest capitalized large U.S. bank as measured by tangible common equity (TCE) and Tier 1 ratios. While our Tier 1 ratio will remain at 11.9% as of December 31, 2008, assuming 100% participation in the exchange, our TCE could increase to as much as $81 billion. Despite this addition of tangible common equity, some people continue to question our capital strength because of our net deferred tax asset (DTA) and the quality of our assets.

  • DTA: Even if near-term conditions deteriorate significantly, we expect to be able to realize the majority of our DTAs.
  • Asset quality: The Fed will conduct stress tests for all large banks in coming weeks. We’ve done our own stress testing using assumptions that are more pessimistic than the Fed has outlined and we are confident about our capital strength.
  • In addition, the Smith Barney joint venture and the conversion of mandatory convertibles is expected to add another $14 billion to our tangible common equity over time.

In addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion. Our client businesses are strong: our deposits are relatively stable, our client-driven Securities and Banking businesses have been performing well, including our recent #1 rank in M&A, and we continue to provide credit to consumer and corporate customers. You have all done a very impressive job driving revenues and reducing our cost structure, and it is gratifying to see the results first hand.

Now; in my experience, when a company tries to differentiate itself from its competitors by denying that they’re anything alike tends to mean that they’re far more alike than anyone wants to believe. This makes me think that Bank of America’s position is a lot more tenuous than Ken Lewis wants to let on.

On the other hand, Vikram Pandit’s memo to employees is focusing on the positive, indicating that things are improving at Citigroup.

Time will tell. Personally, I hope Citigroup survives. In fact, I’m betting that it will, by making a small investment in the company today. Now granted, it’s a small investment; only 200 shares … it won’t kill me if the stock price does go down to nothing; and it will have to go up a lot in order to really make the investment worthwhile.

Right now, some analysts’ target price on Citigroup is around $3.50-$4.00/share. That would be a 250+% increase over my current cost-basis, a tidy little profit, but I’m looking forward to the days years down the road when Citigroup is up around $20.00/share or more again. A pipe dream? Perhaps, but worth the risk.