The Abu Dhabi Investment Authority (Adia) is backing Citigroup to ride out the subprime storm, despite its 44 per cent loss since taking a US$7.5 billion (Dh27.5bn) stake in the world's largest bank in November, an Abu Dhabi investment fund manager said yesterday. "I think Adia has a long-term view for these stakes," Sebastien Henin, a fund manager at the Abu Dhabi Investment Company (Adic), told Bloomberg yesterday at a conference in Paris. "Even if they face some losses, it is not a problem for them, because they have time".
Adic and Adia are owned by the Government. Adia is said to be the largest sovereign wealth fund in the world, with upwards of $500bn in assets amassed from excess oil revenues. Adic was part of Adia until last year, when it was transferred to another sovereign wealth vehicle, the Abu Dhabi Investment Council. When Adia invested in Citigroup last November, the banking giant's stock was trading at $30.70 a share. The investment looked even better in December, when shares had climbed 13.25 per cent to $34.77. Since then, however, Citi stock has taken a major tumble. It closed on Tuesday at $17.13 a share, down more than 44 per cent since Adia bought in and near its lowest level in 10 years.
While Adia's investment in Citi - its highest profile move to date - was initially hailed as a bold and potentially profitable rescue of a bank in distress, there is now little optimism about its prospects. It is hard to find any analyst's report on the company that does not include "reducing estimates". "We are hard pressed to find a catalyst that will move the group significantly higher over the next few months, as fundamentals continue to deteriorate," William Tanona, a Goldman Sachs analyst, wrote in a report on the company last week.
"In addition, we also believe a recovery will take longer than originally anticipated." Citi - like other banks in the US, the UK and Europe - has been hit hard by the global credit crunch and the US subprime mortgage crisis. It has written down more than $46bn in losses in the past year, and analysts expect more bad news to come. Just yesterday the Swiss bank, UBS, released a report projecting $8.7bn in additional write downs for Citi in the second quarter of this year, in line with analyst estimates of $8bn to $9bn. Citi has also announced 13,000 job cuts this year.
As bleak as Citi's future looks, Adia's nine-month-old investment is far from a lost cause - that could take a decade or more to decide. "In my opinion, the Adia investment was clearly very long term in nature," said Gregory Siegel, an analyst at Credit Suisse. "The timing was unfortunate for them, but also perhaps reflected an expectation that shares could further weaken before recovering. Such sovereign wealth funds are in the position of being able to have such a distant time horizon, as compared with more short-term-focused mutual and hedge funds."
The fact that Adia's stake came in the form of convertible stock that yields 11 per cent per year also defrays some of the losses. "They don't have to convert," said Giyas Gokkent, the head of research at National Bank of Abu Dhabi, the emirate's largest bank by market value. "I think it's a good deal. Right now, they are getting a fixed return of 11 per cent on their investment." The Citigroup stake is one of the few investments that Adia has made public; it is known for keeping a tight lid on its strategies. In recent months, however, the fund has begun to divulge more to the public. It has set up a website with a listing of its board of directors and has granted interviews with the American magazine, BusinessWeek.
In a recent article based on those interviews, Sheikh Ahmed bin Zayed, the managing director of Adia, said that the short-term for Adia was "three to five years forward", and within that time frame, US stocks looked "very attractive". * with Bloomberg @Email:afitch@thenational.ae
