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Citi may write down $18.7B, Goldman analysts say, which could force bank to slash dividend

Citi may write down $18.7B, Goldman analysts say, which could force bank to slash dividend

When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion (euro5.51 billion) to $11 billion (euro7.58 billion) in the fourth quarter because of exposure to bad loans, investors recoiled at the size of the losses. Some now say those early estimates appear drastically understated.
Citigroup Inc. could write off as much as $18.7 billion (euro12.88 billion) in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.
Citi has about $55 billion (euro37.89 billion) in exposure to subprime mortgages, about $43 billion (euro29.62 billion) of which are collateralized debt obligations, or CDOs, that have mortgages underlying them.
"We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," the Goldman analysts wrote.
Already, Citi has been propped up by a $7.5 billion (euro5.17 billion) investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that in late November bought a 4.9 percent stake in the bank.
But if Citi must write down the value of its portfolio by more than it estimated back in early November _ a distinct possibility, given the lack of improvement in the tight credit markets _ Goldman analysts said the bank may need to raise an extra $5 billion (euro3.44 billion) to $10 billion (euro6.89 billion) in cash.
When Citi said Nov. 4 that its writedown could be between $8 billion (euro5.51 billion) to $11 billion (euro7.58 billion), it acknowledged the value could end up being larger. City says it will not revise its estimate throughout the fourth quarter as credit conditions changed.
Citi shares fell 83 cents, or 2.7 percent, to $29.62 in midday trading. They have tumbled about 45 percent since the beginning of the year.
A dividend cut is a possibility facing many banks wrangling with their losing investments in subprime mortgages. UBS recently replaced its 2007 cash dividend with a stock dividend, in a cash-raising effort that also included selling a $9.75 billion (euro6.72 billion) stake to a Singapore fund, borrowing about $11.5 billion (euro7.92 billion) from outside investors and selling treasury shares.
CIBC World Markets Corp. analyst Meredith Whitney has said for months that Citi's dividend should be on the chopping block. Earlier this month, she wrote that along with cutting the dividend, Citigroup should raise at least $30 billion (euro20.67 billion) in additional capital and sell at least $100 billion (euro68.89 billion) in assets.
Citi's board has said it intends to maintain its dividend, but the new CEO, Vikram Pandit, did not rule out a dividend cut when asked about it on Dec. 11. He also did not rule out more asset sales: "I will undertake an objective and dispassionate review of all the businesses, individually and in aggregate, to make sure we are properly positioned for the future," Pandit said at the time.
Citi has gone through quite the overhaul since the summer. In early November, Citi ousted Chief Executive Charles Prince. About five weeks later, the bank replaced him with Morgan Stanley alum Vikram Pandit. Pandit had been in charge of Citi's investment banking, which has recently been restructured.
Citi has shuffled out other high-level employees, too, but has not announced a big round of layoffs. Some say it is only a matter of time; the bank has confirmed it is looking for ways to cut costs.
Goldman increased its estimate for Citi's fourth-quarter loss to $1.33 (euro.92) per share, from 52 cents per share, based on the higher writedown prediction. Analysts polled by Thomson Financial, on average, predict a loss of 63 cents per share for the fourth quarter, which ends Monday.
The Goldman team also said they expect an additional $11.5 billion (euro7.92 billion) write-off from Merrill Lynch & Co., and increased their loss estimate for the broker to $7 (euro4.82) per share for its fourth quarter from a loss of $1.50 (euro1.03) per share. Wall Street, on average, expects Merrill to report a loss of $2.78 (euro1.92) per share, according to Thomson Financial.
Merrill fell $1.21, or 2.2 percent, to $53.33.
Goldman analysts also predict a $3.4 billion (euro2.34 billion) writedown at JPMorgan Chase & Co., and cut their profit estimate to 65 cents per share from $1.04 (euro.72). Analysts, on average, see JPMorgan posting a profit of $1.03 (euro.71) per share, according to Thomson Financial.
JPMorgan shares fell 44 cents to $44.50.
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AP Business Writer Eileen Connelley contributed to this report.


Updated : 2021-02-26 23:41 GMT+08:00