Moody's reviewing Citi ratings, may downgrade

NEW YORK - Moody's Investors Services on Friday placed the ratings of Citigroup Inc. and its lead bank under review for possible downgrade, citing growing pressure on the bank and its falling stock price.

Separately, Standard & Poor's Ratings Services kept its counterparty credit rating on Citi, but lowered its ratings on Citi's hybrid capital issues on concerns that worsening earnings may lead to a dividend cut.

The ratings moves came after Citi posted a loss of $8.29 billion, its fifth-straight quarterly loss, and said it will split its traditional banking business and its asset management and consumer finance segments into two.

Citi shares fell 33 cents, or 8.6 percent, to close at $3.50. The stock has lost 48 percent of its value this week.

Moody's placed its "A2" rating on Citi's senior debt and its Prime-1 rating on its short-term debt under review, along with its "Aa3" long-term rating on Citibank N.A. It also lowered its ratings on preferred stock to "Baa3" from "Baa2," and cut its bank financial strength rating on Citibank N.A. to "C-" from "C," which translates to a chance in the baseline credit assessment to "Baa1" from "A3."

"The downgrade of the financial strength rating reflects further deterioration in Citibank's standalone creditworthiness that is represented by its relatively low tangible common equity ratio and growing pressures on its franchise value," Moody's said.

Both the preferred stock rating and the financial strength rating are under review for further downgrade. The moves do not affect debt guaranteed by the Federal Deposit Insurance Corp.

The lower a credit agency rates a company's debt, the more expensive it is for the company to borrow money. Moody's said its review will focus on three issues: the potential for and possible implications of further support for Citi from the government, Citi's financial prospects and the credit implications of breaking up the financial services giant.

Moody's downgrade of the preferred stock rating reflected concern that Citi will defer its dividend. "Citigroup's current preferred dividend payments are a hurdle for future capital generation, especially when considering Citigroup's poor earnings prospects for 2009," said Moody's senior vice president, Sean Jones.

S&P also cited dividend concerns in lowering its ratings on Citi's hybrid capital issues, to "BB" from "BBB."

While the agency said most of its write-downs should be behind it, "Citi is still exposed to worsening consumer and commercial credit performance," and excluding gains from the planned combination of its Smith Barney unit with Morgan Stanley, Citi "could be hard-pressed to achieve even break-even net earnings in full-year 2009." Although it has outlined plans for restructuring, S&P noted, the options for selling off business units "are unattractive in the current environment."

S&P kept its counterparty credit rating at "A/A-1" and affirmed its ratings on Citi's subsidiaries, including Citibank N.A., at "A+/ Stable/A-1." The outlook is stable.

"We believe Citi will face a tough credit cycle in the next two years, which could result in weak and volatile earnings. For now, we assume that additional government support would be extended if the need arose, thereby stabilizing the counterparty credit rating," S&P analyst Scott Sprinzen wrote. "Ultimately, though, with sufficiently material additional weakening of Citi's standalone credit profile, or changes in government policy with respect to support of financial institutions that could emerge under the new administration, the ratings could be jeopardized, although these are prospects that we still see as remote."

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