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Nov 12 (Reuters) - Citigroup downgraded E*Trade Financial Corp (ETFC.O) to "sell" from "hold," saying a bankruptcy risk cannot not be ruled out for the U.S. online brokerage, and the company's shares fell about 27 percent.
E*Trade, which also saw a price target cut at Banc of America, had on Friday said it expects further write-downs on its $3 billion asset-backed securities portfolio.
It had also said the U.S. Securities and Exchange Commission was investigating whether its Capital Markets division executed orders ahead of customer orders during the period 1999 to 2005.
"The continued negative news flow about charges resulting from its mortgage and CDO (collateralized debt obligation) exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition," Citi analyst Prashant Bhatia said.
The $15 billion of deposits in 57,000 accounts represent roughly 25 percent of the New York-based company's funding, and deposit attrition could lead to forced selling of the assets that are supported by these deposits, he said.
"There may be layers of protection for customers, but in our view, customers may withdraw assets first, and ask questions later," Bhatia wrote in a note to clients.
According to his estimates, E*Trade could realize losses of over $5 billion if it tries to liquidate its loan and asset-backed securities portfolio as a result of losing its funding sources.
Citi's Bhatia cut his price target to $7.50 from $13, while BofA analyst Michael Hecht reduced his target by $1.50 to $10.50 citing diminished earnings visibility. Hecht maintained his "neutral" rating on the stock.
Shares of the company were trading at $6.30 in early electronic trade on Monday, after closing at $8.59 Friday on the Nasdaq. (Reporting by Tenzin Pema in Bangalore; Editing by Deepak Kannan)