Citigroup May Write Down $8 Billion: Analyst

Deutsche Bank analyst Mike Mayo said that Citigroup may post third-quarter write-downs of about $8 billion from its exposure to collateralized debt obligations (CDOs), a day after Merrill Lynch agreed to sell its CDOs for just 22 cents on the dollar.

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The analyst also forecast a third-quarter loss for Citigroup , and shares of the largest U.S. bank fell 4 percent to $16.70 in trading before the bell, from Monday's close of $17.43 on the New York Stock Exchange.

Citigroup has $22.5 billion of net CDO exposure, and based on Merrill's expected write-downs it could have another $7 billion of write-downs, Mayo said.

The bank is also likely to incur a $1 billion loss on its remaining $2 billion exposure to monoline bond insurers, he said.

"Citi should still be able to absorb much of these charges and credit costs in general given an estimated $20 billion of second-half 2008 pre-provision, pre-tax earnings and the sale of its German retail business ... but the decision about raising new capital could be closer than we previously thought," Mayo wrote in a note to clients.

The analyst cut his third-quarter estimate by $1 to a loss of 59 cents a share. For 2008, he expects Citigroup to post a wider loss of 80 cents a share, from a loss of 66 cents a share.

Mayo maintained his "hold" rating on the stock.

On Monday, Merrill said it would take a $5.7 billion third-quarter write-down as it unloads huge amounts of risky debt, and would raise $8.5 billion by selling new stock.

In a sign of how toxic Merrill's debt holdings have become, it agreed to sell $30.6 billion of CDOs, a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just $6.7 billion, or about 22 cents on the dollar.

The fire-sale nature of that deal will add to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.

"The biggest read across to other firms will be Citigroup which has been far less aggressive in their marks on CDOs, in our view," Goldman Sachs analyst William Tanona wrote in a note to clients.

He said that if Citigroup were to mark its exposure to a level similar to that of Merrill, it would imply a $16.2 billion write-down and roughly $2 per share impact.

"Though Citi defends their marks, due to their earlier vintages and high concentration of commercial paper, we continue to believe they would struggle to obtain their prices in the marketplace today," Tanona added.

In a separate report, J.P. Morgan Securities analyst Kenneth Worthington said Merrill's sale of its CDO portfolio brings transparency to the market, but means more write-downs for peers.

"Given the sale of Merrill's $30.6 billion ABS CDO portfolio, we expect peers will adjust marks, eliminating an incentive to hold on to impaired assets," Worthington said. "We see this a part of the cleansing process and expect increased liquidity in the CDO market and mortgage markets."

He also expects Goldman Sachs and private equity companies, with excess capital and fund-raising ability, to be the main beneficiaries from a credit market that appears in the early stage of being on the mend.

Through Monday, Citigroup shares have fallen 41 percent this year.