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 Inc. could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William Tanona, Betsy Miller and Neil Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to cut 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. At the time, Citi said it would not revise its estimate throughout the fourth quarter as credit conditions changed, and spokeswoman Shannon Bell said Thursday the bank does not comment on analyst reports.
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.
CIBC World Markets Corp. analyst Meredith Whitney has said for months that Citi’s dividend should be on the chopping block.
Earlier 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 new chief executive Vikram Pandit did not rule out a dividend cut when asked about it Dec. 11. He also did not rule out more asset sales: “I will undertake an objective and dispassionate review of all the businesses, individually and in aggregate, to make sure we are properly positioned for the future,” Pandit said at the time.
The Goldman team also said it expects an additional $11.5 billion write-down from Merrill Lynch & Co. and increased its loss estimate for the broker to $7 per share for the fourth quarter, from a loss of $1.50 per share. Wall Street, on average, expects Merrill to report a loss of $2.78 per share, according to Thomson Financial.
