By Mike Caggeso
Citigroup Inc.'s (C) financial troubles will continue to spread beyond subprime mortgage write-downs and into the bank's consumer divisions, said William Tanona, a Goldman Sachs Group Inc. (GS) analyst, who recommends that clients sell Citigroup shares.
Those issues – combined with unsuccessful attempts to find a new chief executive officer, and calls for the company to cut its dividend – leave little in the way for good news for investors to cling to. Until a new leader is found, former Treasury Secretary Robert Rubin is acting chairman, and Win Bischoff, the bank's senior executive in Europe, is interim CEO.
"The lack of leadership at this point in Citi's storied history could not have come at a worse time. With deteriorating consumer and housing metrics, Citigroup is facing mounting pressure across many businesses," Tanona said, downgraded Citigroup's shares from "neutral" to "sell."
Citigroup's shares have plunged 43% this year, more than any company in the KBW Bank Index – except for Washington Mutual Inc. (WM) and National City Corp. (NCC), Bloomberg News reported. The closing price yesterday (Monday) was $32, the lowest for Citi since March 2003.
Goldman's Tanona estimates Citigroup, the largest U.S. bank, will write down $15 billion on the value of collateralized debt obligation (CDO), a derivative debt security that MarketWatch describes as "mutual funds that hold asset-backed securities… sliced up and sold to institutional investors." Many CDOs have been buying up subprime mortgage-backed securities, and ownership of them is the last thing Citigroup needs in its portfolio.
Tanona also cut his price estimate of Citigroup's shares to $33 – which they've reached since he wrote his report – and he lowered his estimates of Citigroup's earnings per share next year from $4.65 to $3.80.
But Citigroup wasn't the only lender to face Tanona's red pen – the analyst also cut price estimates for Merrill Lynch & Co. Inc. (MER) [from $66 to $59], Morgan Stanley (MS) [from $66 to $61], JP Morgan Chase & Co. (JPM) [from $51 to $46], Bear Stearns Cos. (BSC) [from $118 to $106], Lehman Brothers Holdings Inc. (LEH) [$71 to $70] and E*Trade Financial Corp. (ETFC) [from $15 to $6].
In case you've been living in a bomb shelter, Citigroup – like many of its fellow lenders – began its freefall when subprime mortgage defaults crashed the banking sector in August. From there, the dominoes that hit the ground have included:
- Citigroup's inability to contain write downs, now estimated at $15 billion
- The possible $30 billion capital shortfall, possibly leading to dividend cuts or asset sales
- A 57% drop in third-quarter earnings.
- The forced "retirement" of CEO Chuck Prince.
- A ho-hum reaction to a multi-bank fund meant to protect banks from further fallout
And yet, despite more troubles ahead, a Citigroup analyst suggested Friday [seemingly smelling Goldman's downgrade] that now is the time to buy the bank's U.S. stocks.
In an investment report, Tobias Levkovich raised his rating on the company to "overweight" from "market weight" because of "compelling valuation, depressed earnings revision data and awful investor sentiment," Bloomberg reported.
"The banks' group has taken some sharp hits due to the subprime woes, and there appears to now be a pile-on effect that seems to be overdone," Levkovich wrote on Nov. 16.
Shares of Citigroup slid a little more than 2% Tuesday, to close at $31.35.
News and Related Story Links:
Goldman says sell Citi amid credit woes
- Money Morning:
Citigroup's Troubles Continue to Grow
- Money Morning:
Banks Create Fund to Help to Fight Woeful Credit Market
- Bloomberg News:
Citigroup Downgraded to 'Sell' at Goldman Sachs.
- Bloomberg News:
Citigroup's 'Sells,' SABMiller's Bid, Gasoline's Rise: Timshel.