Analysis: Hedge funds cut BofA for Citi

NEW YORK/CHARLOTTE, North Carolina (Reuters) - Hedge fund manager Lee Ainslie swapped a bet on one big bank for another in the second quarter, selling off all his shares of Bank of America Corp BAC.N and investing in Citigroup Inc C.N instead.

Ainslie’s Maverick Capital was joined by a number of other top hedge funds that shifted dollars away from BofA and toward Citi in the quarter, potentially signaling a shift in fortunes for the two financial service giants.

Shares of BofA have so far recovered far better from the 2008 market crash.

But the Charlotte, North Carolina-based lender’s greater reliance on U.S.-based customers may now be a disadvantage in light of the weaker U.S. economic picture and tighter financial regulations, some analysts and investors said.

“Globally, there’s far greater opportunity for Citigroup than for Bank of America,” said Bill Fitzpatrick, analyst at Optique Capital Management.

The shifting sentiment was clear in the second quarter “Smart Money” survey compiled by Thomson Reuters from securities filings of the portfolios of 30 of the biggest fundamentally-oriented hedge funds.

Larry Robbins’ Glenview Capital sold down some of its BofA position while adding to its Citi stake. Andreas Halvorsen’s Viking Global Investors, Chris Shumway’s Shumway Capital and Steve Mandel’s Lone Pine capital all exited BofA. Bill Ackman’s Pershing Square Capital and Thomas Claugus’s GMT Capital took up new stakes in Citi.


BofA share movements reflect investor worries about the U.S. economy, analysts said, as unemployment hovers near 10 percent and GDP growth is weak.

One of every two U.S. households does business with BofA, whether through loans or deposits.

Citigroup, in contrast, is much less exposed to U.S. consumers and regulations. It has only about 1,000 North American retail branches, compared to BofA’s 6,000-plus U.S. branches.

“Economic data is weak, joblessness is high, and we’re all uncertain of the rules of the road going forward,” said Adrian Cronje, chief investment officer at Atlanta-based wealth management firm Balentine. “Financial regulation itself is an incredible bill with impact that is not properly understood.”

Citigroup almost matches the overall number of loans and deposits at BofA, yet depends on North America for only about 37 percent of its deposits and 69 percent of its loans. But roughly 80 percent of BofA’s loans and deposits come from U.S. consumers, analysts said. <See graphic>

BofA’s consumer business could change dramatically under the new banking rules, including a provision that restricts the fees banks receive from processing debit cards.

The provision will affect both companies, but BofA’s U.S. debit business is more than 10 times bigger than Citigroup’s. In July, BofA warned that it could lose $1.8 billion to $2.3 billion of its $2.9 billion annual debit processing revenues under the law. <See graphic>

“From a regulatory perspective, Bank of America’s much more impacted ... than Citigroup,” said Michael Nix, portfolio manager with Greenwood Capital Associates.


The hedge funds’ sales stand in contrast to the first quarter, when broader optimism about the U.S. economy and the banking sector’s recovery pushed top investors to increase their holdings of BofA stock.

Since then, “Citigroup’s had a little more of a positive trajectory,” said Anton Schutz, president of Mendon Capital Advisors.

To be sure, both BofA and Citi are still top bets among many of the largest hedge funds.

David Tepper’s Appaloosa Management reduced positions in both BofA and Citi in the second quarter but still holds large stakes, as does John Paulson, who stood pat with his multibillion-dollar positions.

BofA shares were still the No. 1 most-owned in the portfolios of the “Smart Money” 30 hedge funds for the quarter and remain attractive in the long-term, investors and analysts said. Citi was the second-largest position.

Another factor aiding Citi shares in the short-term will likely be the winding down of the U.S. government’s role as a major shareholder.

The U.S. Treasury has whittled down its stake since April but still holds almost 18 percent. Its rolling share sales are due to end by mid-December, giving investors hope that Citi shares will bounce above today’s low price levels.

“Citi’s stock will move out materially when the news comes out that the government is done,” Schutz said.

Reporting by Maria Aspan in New York and Joe Rauch in Charlotte; editing by Aaron Pressman and John Wallace