KEY POINTS:
Citigroup shares suffered a fresh beating yesterday after Goldman Sachs downgraded the stock to "sell" from "neutral," and said the largest US bank may have to write off US$15 billion ($19.97 billion) over the next two quarters as mortgage losses reduce earnings.
Shares of Citigroup fell as much as 5.9 per cent, leading a broad decline in financial services stocks. They had slid 29 per cent in the previous five weeks.
Yesterday's report from analyst William Tanona came shortly after Citigroup's own chief US equity strategist, Tobias Levkovich, upgraded the nation's banking sector to "overweight" from "market weight", calling selling pressure "overdone".
Goldman's forecast compares with the US$8 billion to US$11 billion that Citigroup on November 4 said it may write off this quarter for exposure to sub-prime mortgages and collateralised debt obligations.
Charles Prince, Citigroup's chief executive, resigned the same day.
"With deteriorating consumer and housing metrics, Citigroup is facing mounting pressure across many businesses," Tanona wrote. "The lack of leadership at this point in Citigroup's ... history could not have come at a worse time."
Tanona projected writedowns of US$11 billion this quarter and US$4 billion in the first quarter of 2008. A US$15 billion loss would, after taxes, wipe out close to six months' profit.
"[Citigroup's] risk-taking culture may be irreparably damaged," Tanona wrote.
Tanona said the bank may need to cut its US54c-per-share quarterly dividend or find new capital to shore up capital levels. He also cut Citigroup's price target to US$33, and his profit-per-share forecast to US$3.80 from US$4.65 for 2008, and to US$4.60 from US$5.20 in 2009.
The analyst also lowered his price targets for six other banks and brokerages: Bear Stearns, E*Trade Financial, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley.
Citigroup shares were down US$1.94, or 5.7 per cent, to US$32.06 in afternoon trading on the New York Stock Exchange, after falling to US$32. The 24-member Philadelphia KBW Bank Index was down 1.9 per cent. Citigroup shares touched US$31.06 on November 8, their lowest level since March 2003.
Banks have announced more than US$50 billion of writedowns tied to the US housing slump, as defaults soared and the value of mortgages that investors deemed too risky plummeted.
UBS, Switzerland's largest bank, might face "substantial" losses on some US$20.2 billion of highly-rated CDOs, independent research firm CreditSights said yesterday.
The projected US$8 billion to US$11 billion writedown at Citigroup is on top of a US$1.83 billion mortgage-related loss that the New York-based bank took in the third quarter.
Citigroup also provided US$7.6 billion of financing as of October 31 to so-called structured investment vehicles after they were unable to pay down maturing short-term debt, according to a November 5 regulatory filing.
The bank said on November 4 it had no plans to cut its dividend.
Following Prince's departure, former US Treasury Secretary Robert Rubin became Citigroup's chairman, while Sir Win Bischoff, the bank's top Europe executive, became interim chief executive.
Among 19 analysts who cover Citigroup, eight rate it "buy" or the equivalent, seven rate it "hold" and four rate it "sell", Reuters Estimates said.
Analysts, on average, expect profit per share of US$4.29 in 2008 and US$4.32 in 2009, it said.
Citigroup strategist Levkovich on November 16 upgraded the banking sector, citing its "compelling valuations and beaten down earnings estimate revisions, not to mention repulsive sentiment around these stocks, a contrarian signal". Levkovich also wrote that worries about sub-prime exposures have created a "pile-on effect that seems to be overdone".
He admitted his upgrade may seem "fairly controversial".
- Reuters
