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Citigroup's Write-Down For Bad Loans Could Be $18.7 Billion

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By MADLEN READ, The Associated Press

Published: December 28, 2007

NEW YORK - When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion to $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 could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they said, the bank may be forced to lower its dividend by 40 percent.
Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, 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 $7.5 billion investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that in late November bought a 4.9 percent stake in the bank.

But if Citi must write down the value of its portfolio by more than it estimated in early November - a distinct possibility, given the lack of improvement in the tight credit markets - Goldman analysts said the bank may need to raise an extra $5 billion to $10 billion in cash.

When Citi said Nov. 4 that its write-down could be $8 billion to $11 billion, it acknowledged the value could end up being larger. Citi said at the time that it would not revise its estimate throughout the fourth quarter as credit conditions change.
Citi shares fell 89 cents, or 2.9 percent, to close at $29.56 Thursday. 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 2007 cash dividend with a stock dividend, in a cash-raising effort that also included selling a $9.75 billion stake to a Singapore fund, borrowing about $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. This month, she wrote that along with cutting the dividend, Citigroup should raise at least $30 billion in additional capital and sell at least $100 billion in assets.

Citi's board has said it intends to maintain its dividend, but the new chief executive officer, Vikram Pandit, did not rule out a dividend cut when asked about it Dec. 11. He also did not rule out more asset sales.
Citi has gone through quite an overhaul since the summer. In early November, Citi ousted CEO Charles Prince. About five weeks later, the bank replaced him with Morgan Stanley alum 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's 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 $1.33 per share from 52 cents per share, based on the higher write-down prediction.

The Goldman team also said they expect an additional $11.5 billion write-off from Merrill Lynch & Co. and increased their loss estimate for the broker to $7 per share for its fourth quarter from a loss of $1.50 per share.

Goldman analysts also predict a $3.4 billion write-down at JPMorgan Chase & Co. and cut their profit estimate to 65 cents per share from $1.04.

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