Citigroup Falls to Four-Year Low After Analyst Cuts (Update3)
By Bradley Keoun and Sebastian Boyd
Nov. 1 (Bloomberg) -- Citigroup Inc., the largest U.S. bank, fell to the lowest in four years in New York trading after three analysts cut their ratings and CIBC World Markets said the company may have to reduce its dividend to shore up capital.
CIBC and Morgan Stanley recommended investors sell the shares, while Credit Suisse analyst Susan Roth Katzke reduced her rating to the equivalent of hold from buy. Citigroup may have to sell assets, shrinking opportunities for growth, because it needs to increase capital by $30 billion, CIBC said.
Analysts are souring on Citigroup after the company reported $6.5 billion in writedowns and losses from credit markets, jeopardizing Chief Executive Officer Charles Prince's promise to increase earnings faster than costs. The combination of $25 billion of acquisitions in the past 19 months and the lowest cushion for losses ``in decades'' increases the risk of owning the stock, CIBC's Meredith Whitney said.
``The Citigroup news is a wake-up call for those who think these issues will go away with the Fed cutting rates,'' said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages $60 billion. ``We're not going to get resolution on these credit issues for months.''
Policy makers lowered the Fed's overnight lending rate between banks yesterday for the second time in as many months. The move was supposed to help the economy withstand the fallout from August's credit market collapse.
Shares Decline
Citigroup fell $2.82, or 6.8 percent, to $38.54 in composite trading on the New York Stock Exchange at 2:12 p.m., after falling as low as $38.13.
Citigroup spokesman Michael Hanretta said he couldn't comment on speculation about dividend changes or asset sales.
All 24 members of the KBW Bank Index fell, the worst day for the industry benchmark in more than five years, on concern that surging losses on subprime mortgages may force banks to curtail other types of consumer loans.
Bank of America Corp., the second-biggest U.S. bank by assets, tumbled $2, or 4.1 percent, to $46.28. No. 3 JPMorgan Chase & Co. fell $2.35, or 5 percent, to $44.65.
``It's possible there's going to be some enormous credit losses and strains on capital to deal with all these pieces of financial machinery out there,'' said Brian Barish, president of Denver-based Cambiar Investors, which manages $9 billion.
The world's largest banks and securities firms announced more than $30 billion of charges in the third quarter.
Washington Mutual
Washington Mutual Inc., the biggest U.S. thrift, fell $2.26, or 8.1 percent, to $25.62. New York Attorney General Andrew Cuomo sued First American Corp., the largest U.S. title insurer, for allegedly inflating home values under pressure from Seattle-based Washington Mutual.
``You start pulling on strings and you find new problems in new places and there doesn't seem to be an end to it,'' Barish said.
Prince began making acquisitions after the Fed lifted a ban on deals by the company in March 2006. In April of this year, Citigroup bought 61 percent of Nikko Cordial Corp. for $7.7 billion, then in June increased its stake to 68 percent. Earlier this month, the company said it would acquire the rest of Nikko Cordial for $4.6 billion.
Such a ``buying binge'' hasn't translated to increased earnings, Whitney said.
Profit Drop
Writing down the value of loans and so-called collateralized debt obligations drove Citigroup's third-quarter profit to the lowest in three years. The losses led to the departure of trading chief Thomas Maheras and fixed-income division head Randy Barker. Michael Raynes, who headed structured credit, and Nestor Dominguez, co-chief of collateralized debt obligations, left this week, company spokeswoman Danielle Romero-Apsilos said today. The Financial Times previously reported the departures.
Citigroup's tangible equity, as a percentage of tangible assets, fell to 2.8 percent, half the average of its peer group, Whitney said. She cut her estimate of Citigroup's earnings per share for this year to $3.68 from $3.75, and reduced her outlook for next year to $4.20 from $4.55.
Whitney lowered her rating on Charlotte, North Carolina- based Bank of America Corp. to ``sector perform'' from ``sector outperform.''
She also cut her 2008 profit estimate at Bank of America by 7.6 percent to $4.85 a share, citing ``protracted pressure on financials at large.'' The stock will trade at 10 to 11 times next year's earnings, down from a previous estimate of 13 times, according to Whitney.
Protracted `Dislocation'
The downgrade is ``based upon our view of a protracted capital markets dislocation and is not rooted in larger concerns over consumer credit,'' she said.
Citigroup has lost almost a third of its value this year, making the stock look cheap because of its $2.16-a-share dividend. The company's 12-month dividend yield climbed to 6.95 percent, the highest in at least two decades, Bloomberg data show.
``It is plausible that they might have to cut their dividends but at this point it's too early to tell,'' said Thomas Forsha, a Louisville, Kentucky-based portfolio manager who helps run the ABN Amro Global High Income Equity Fund. ABN Amro Asset Management oversees about $300 billion. ``It's either going to be a great value or it's going to be a big problem.''
To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net ; Sebastian Boyd in London at sboyd9@bloomberg.net .
Last Updated: November 1, 2007 14:32 EDT |
