November 5, 2007 / 3:52 PM / 12 years ago

UPDATE 1-RESEARCH ALERT-Brokers see higher write-downs at Citi

BANGALORE, Nov 5 (Reuters) - Brokerages warned of further incremental write-downs and losses related to Citigroup Inc’s (C.N) collateralized debt obligations (CDO) exposure, but expect Chief Executive Charles Prince’s departure to lift the stock in the near future.

The world’s biggest bank said on Monday that it revised lower its third-quarter earnings per share to reflect the correction on the valuation of its $43 billion CDO exposure. Shares of the company fell almost 6 percent to a new year-low of $35.6.

Goldman Sachs, Banc of America and UBS cut their price target on the stock, after Citi said on Sunday it may suffer an additional $11 billion write-down for subprime losses and an embattled Prince stepped down.

Citi’s stock has plunged almost 38 percent from the start of the year, as the company roils in a credit crunch triggered by banks worldwide taking charges on holdings in mortgage-backed securities which have been hit by a meltdown in loans extended to borrowers with patchy credit histories.

Punk Ziegel analyst Richard Bove predicted that the $11 billion write-down might result in Citi posting a loss of 26 cents a share in the fourth quarter.

Bove, who had upgraded Citigroup to “market perform” from “sell” on Saturday, said the second major write-down and reserve addition is likely to calm fears of unknown events causing disarray with the firm’s capital.

Bove does not expect Citi to be split up, though he said that such speculation may arise.

Bear Stearns’ David Hilder said, “We believe Citi’s board still has no desire to preside over a break-up, but it is an option that a new CEO would certainly want to examine.”

UBS analyst Glenn Schorr said even if Citi is to land a high-caliber CEO from the outside, there are “no easy fixes for the very large and complex organisation.”


Severely low capital ratios will be the main area of focus for Citi and, as its price heads towards the low 30s, pressure will be felt across all financial stocks, CIBC World Markets analyst Meredith Whitney said.

“The math on this announcement just doesn’t add up in our opinion,” Whitney added.

She downgraded Citi last week to “sector underperformer” from “sector performer,” prompting a broad stock market sell-off. She had said the company will need to raise more than $30 billion in capital over the near term through either asset sales, a dividend cut, a capital raise, or a combination of these.

Citi, however, on Sunday laid investor fears of a dividend cut to rest when it reaffirmed its commitment to pay the current dividend. The company forecast that by the end of the second quarter of 2008, its capital ratios will be in line with desired targeted levels.

Analysts have been expecting that with a $2.7 billion quarterly dividend to pay, equal to 54 cents a share, Citi might have to consider asset sales or limiting trading activity, reducing potential for profitability.


Prince’s departure was not a surprise, but the size of the write-downs and the speed of deterioration of bank’s exposure to U.S. housing losses has alarmed investors as they remain jittery that more bad news will emerge across the sector.

The S&P electronic traded fund for financials (XLF.A) fell as much as 3 percent as mounting write-downs for credit losses at Citi rattled investors.

European banks also sank on Monday, battered by fears over their exposure to big losses after Citi’s announcement, with the DJ Stoxx European banking sector index .SX7P, which includes UBS UBSN.VX, Credit Suisse CSGN.VX and Deutsche Bank (DBKGn.DE), trading down almost 2 percent at 441.76 points.

The following table has the price target cuts on Citigroup:


Old New

Goldman Sachs $51 $48 Neutral

Banc of America $50 $45 Buy

UBS $47 $40 Neutral ((Editing by Pratish Narayanan; Reuters; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800))

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