When Citigroup warned early last month that it was likely to write down its portfolio by US$8 billion to US$11 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 US$18.7 billion in the fourth quarter, wrote Goldman analysts William Tanona, Betsy Miller and Neil Sanyal in a note to investors late on Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.
Citi has about US$55 billion in exposure to subprime mortgages, about US$43 billion of which are collateralized debt obligations 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 US$7.5 billion investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that bought a 4.9 percent stake in the bank late last month.
But if Citi must write down the value of its portfolio by more than it estimated early last month -- a distinct possibility, given the lack of improvement in the tight credit markets -- Goldman analysts said the bank might need to raise an extra US$5 billion to US$10 billion in cash.
When Citi said on Nov. 4 that its writedown could be between US$8 billion and US$11 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 US$0.83, or 2.7 percent, to US$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 cash dividend this year with a stock dividend, in a cash-raising effort that also included selling a US$9.75 billion stake to a Singapore fund, borrowing about US$11.5 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 US$30 billion in additional capital and sell at least US$100 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. Early last month, Citi ousted chief executive officer Charles Prince. About five weeks later, the bank replaced him with Morgan Stanley alumnus 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 US$1.33 per share, from US$0.52 per share, based on the higher writedown prediction. Analysts polled by Thomson Financial, on average, forecast a loss of US$0.63 per share for the fourth quarter.
The Goldman analysts also said they expected an additional US$11.5 billion write-off from Merrill Lynch & Co and increased their loss estimate for the broker to US$7 per share for its fourth quarter from a loss of US$1.50 per share. Wall Street, on average, expects Merrill to report a loss of US$2.78 per share, Thomson Financial said.
Goldman analysts also predicted a US$3.4 billion writedown at JPMorgan Chase & Co and cut their profit estimate to US$0.65 per share from US$1.04. Analysts, on average, see JPMorgan posting a profit of US$1.03 per share, according to Thomson Financial.
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