Subprime woes continue for Citigroup, Merrill

HONG KONG: Citigroup, the bank that posted the biggest losses from the collapse of the US mortgage market, may take an additional $8.9 billion in net writedowns in the second quarter, Goldman Sachs said.

Citigroup shares fell to their lowest level in nearly a decade, after a Goldman Sachs analyst said investors should sell the largest US bank���s stock short as losses mount from troubled debt. In morning trading, the shares were down $1.03, or 5.5%, at $17.82 on the New York Stock Exchange.

The shares were among the biggest drags on the Dow Jones industrial average and Standard & Poor���s 500, which both fell more than 1%. Wall Street analysts forecast a second-quarter loss for Merrill Lynch, and said the world���s largest brokerage will likely incur total writedowns in the range of $3.5 billion to $4.2 billion.

Goldman also lowered its rating on Citigroup to ���neutral��� from ���attractive���, saying the pace of deterioration in the industry ���appears to be far worse than it originally anticipated, according to a June 25 note.

���The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,��� Goldman said. ���We see multiple headwinds for Citigroup,��� such as risks of further writedowns, higher consumer provisions, and the potential need for additional capital raisings, dividend cuts or asset sales, Goldman said.

Goldman joined UBS and Merrill Lynch in predicting more writedowns for New York-based Citigroup, already reeling from $42.9 billion of credit-related losses. Citigroup chief executive officer Vikram Pandit has announced 13,000 job cuts this year, and the bank this month forecast ���substantial��� additional writedowns and more losses on consumer loans.

Citigroup may write down $7.1 billion of collateralised debt obligations and associated hedges, and $1.2 billion for other asset classes, Goldman said. It may need to post a $600 million loss to reflect the mark-to-market value of its own structured note liabilities, New York-based Goldman said.

Shares of Merrill were down 3.4% to $34.24 before the bell on Thursday, after analysts at Goldman Sachs and Sanford C Bernstein said they expect Merrill to post its fourth straight quarterly loss from its exposure to collateralised debt obligations (CDOs) and hedges.

���Yet again, the biggest swing factor for Merrill���s upcoming second-quarter results will be the severity of the writedowns related to Merrill���s CDO and mortgage-related exposures,��� Bernstein analyst Brad Hintz wrote in a note to clients.

In addition, the level of valuation reserves Merrill takes against its CDO and mortgage-backed securities hedges will also play a large role in the ultimate size of earnings losses the firm reports, Hintz said.

Goldman cut its six-month price target for Citigroup to $16 and put the New York-based investment bank on its ���conviction sell��� list. Citigroup closed at $18.85 in New York trading on Wednesday, having dropped 36% this year.
Citigroup probably won���t be able to keep its current 7% dividend yield and may need to raise more capital, according to the report.

Goldman estimated Citigroup could generate $3.5 billion in capital a year by cutting payouts in half. ���Given the firm���s current level of earnings power, we do not believe the dividend is safe,��� it said. ���We believe any additional capital raises will be in the form of common equity, dividend cuts and or additional asset sales.���

Citigroup is more exposed to hedges on its leveraged loan and commercial mortgage-backed securities portfolios than Merrill and JPMorgan Chase, indicating higher potential losses, Goldman said.

Merrill analyst Guy Moszkowski this week said Citigroup may post another $8 billion of writedowns this year. UBS analyst Glenn Schorr on June 20 said Citigroup probably will post a second-quarter loss of 40 cents a share after $8.7 billion of asset writedowns.

Goldman Sachs analyst William Tanona also expects Merrill to post a quarterly loss of $2 a share, compared with his earlier estimate of a profit of 25 cents. For 2008, he sees a loss of $3.55, compared with his prior forecast of a profit of 8 cents.