November 1, 2007 / 10:45 AM / 11 years ago

UPDATE 2-RESEARCH ALERT-CIBC cuts Citigroup; shares fall

(Adds Credit Suisse analyst’s comments, updates share movement)

Nov 1 (Reuters) - CIBC World Markets downgraded Citigroup Inc (C.N) to “sector underperformer” from “sector performer,” citing capital concerns, and shares of the largest U.S. bank fell as much as 9 percent to their lowest levels in more than four years.

“We believe Citigroup will need to raise over $30 billion in capital as a result of its tangible capital ratios falling to the lowest levels in decades, now standing at almost half their peer group average at just 2.8 percent,” analyst Meredith Whitney said about the bank, which was also downgraded at Credit Suisse and Morgan Stanley.

Whitney, who cut her 2008 and 2009 earnings estimates for the bank, said she believes Citi will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios, over the near term.

Such a move will place Citi’s stock under significant pressure and the stock could trade into the low $30s, Whitney added.

Punk Ziegel analyst Richard Bove, however, said he was not concerned about the bank’s liquidity or its capital positions. “Plus, $30 billion sounds like a great deal of money but it is not so much to Citigroup. Thirty billion dollars is 1.3 percent of assets,” Bove added.

Bove, who has a “sell” rating on the stock, said he would not want to buy the stock as he expects earnings to be below expectations for the next three quarters.

Bove expects Citi to earn $3.95 a share in 2007 and $4.51 a share in 2008, while CIBC analyst Whitney cut her 2008 earnings view for the bank to $4.20 a share from $4.55 a share, and 2009 earnings view to $4.55 a share from $4.95 a share.

Credit Suisse analyst Susan Katzke, who downgraded the bank to “neutral” from “outperform,” said Citi’s capital was constrained and expects a more aggressive balance sheet rationalization in the coming months.

“The opportunity in this stock rests in prospects for organizational change, that is, a break up of Citi into several separate, more manageable or saleable businesses,” Katzke said.

On Wednesday, Morgan Stanley analyst Betsy Graseck had cut her rating on Citi to “underweight” from “overweight,” citing concerns about the bank’s thin capital levels.

Graseck was also concerned about Citi’s collateralized debt obligation portfolio, subprime consumer exposure and structured investment vehicle exposure.

Shares of Citigroup fell as much as $3.77 to $38.13, their lowest levels in four-and-a-half years. They were trading at $38.41 in morning trade on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore)

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