More Write-Downs Ahead for Citi?

Shares in Citigroup Inc. (C) fell sharply Thursday after Goldman Sachs Group (GS) analyst William Tanoma singled the firm out for more mortgage-led losses in its upcoming Q2 earnings report, saying that the firm could take writedowns of as much as $8.9 billion in the quarter. Tanoma has been consistently bearish on Citi since late last year, but his remarks in a note date June 25 certainly seemed to resonate with skittish investors — shares were at $17.61, down 6.58 percent, when this story was published, their lowest level since October 1998. Tanoma added Citigroup to Goldman’s so-called “conviction sell” list and cut his price target on the stock to $16 from $20, suggesting that the firm would need to further cut its dividend, and went so far as to recommend selling Citigroup short while simultaneously buying shares in Morgan Stanley (MS). “We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales,” he wrote in a research note, according to a published report by Reuters. Tanoma — famously bearish on Citi throughout most of the credit crisis — estimated a $7.1 billion loss from CDOs and monoline bond exposures alone, underscoring the widespread impact of recent downgrades to major bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK). His warning comes a day after Merrill Lynch analysts projected a second-quarter loss and $8 billion of write-downs at Citi. While the bank’s exposure to troubled assets is broad, Citigroup has certainly seen its share of losses derived from mortgage banking activities. 90+ day delinquencies on $154.6 billion of first mortgages in the bank’s portfolio jumped to over 3 percent during the first quarter, while severe delinquencies on $62.5 billion in second liens rose to 1.45 percent in the same time frame. $58.1 billion of the first mortgages Citigroup held were low-doc or no-doc loans, according to an investor presentation in March. “Citigroup’s newly resuscitated motto maintains that ‘Citi never sleeps.’ The bank’s investors, coincidentally, also are suffering some insomnia-filled nights,” wrote Heidi Moore in the Wall Street Journal’s Deal Journal blog. “The capper? With the stock opening this morning at $17.26, Citi’s market cap has fallen below $100 billion.” It stood at just $92.71 billion when this story was published — in contrast, Bank of America Corp. (BAC), set to close in on a deal to acquire Countrywide Financial Corp. (CFC) on July 1, stood at $113.6 billion. Citigroup wasn’t alone in incurring analyst wrath Thursday, however, as Goldman’s Tanoma (along with others) noted expectations of large writedowns at Merrill Lynch & Co. (MER). Writedowns could be as large as $4.2 billion for the second quarter, if the analyst estimates are to be believed. Disclosure: The author was long CFC and held no positions in other publicly-traded firms mentioned when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.