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Citigroup could need to sell assets to prop capital

Citigroup Inc shareholders, cheered by a US$5.1 billion first-quarter loss that wasn’t as big as some analysts forecast, face growing concern that the bank may have to sell assets, reduce the dividend and attract outside investment to bolster capital.

Citigroup’s so-called Tier 1 capital ratio — a measure of its ability to withstand loan losses — fell to 7.7 percent at the end of last month, the New York-based bank said on Saturday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

The bank’s shares surged 4.5 percent yesterday after it reported US$16 billion of asset writedowns during the quarter, less than some observers predicted. The writedowns burned through much of the US$30 billion in capital Citigroup had raised since late last year, leaving it vulnerable to further charges and loan-loss provisions.

“We’re in a recession, they have a huge consumer book and there’s huge double-digit-billion provisions that they’re going to have to take in the next 18 months to two years,” CreditSights Inc analyst David Hendler said. “They’re undercapitalized for their risk.”

A weakening US economy and rising consumer delinquencies have forced chief executive officer Vikram Pandit and chief financial officer Gary Crittenden to back away from assurances earlier this year that the bank didn’t need to raise more capital.

In January, Crittenden said Citigroup “stress-tested” its assumptions under “multiple recessionary scenarios.”

Asked on Friday if the bank might seek an additional infusion, Crittenden said: “You can never say never.”

“This is a difficult business environment,” Crittenden said in a conference call with analysts and investors. “There are no easy solutions here, no silver bullets.”

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, South Korea and Kuwait.

The infusion helped boost Citigroup’s Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year.

The first-quarter loss was second in size in the bank’s 196-year history only to the record US$9.88 billion reported in the previous period.

It wiped out so much capital that Citigroup may have to find outside investors or cut the dividend, Hendler said.
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