Dec. 14 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit's decision to bail out seven subprime- infected investment funds with $49 billion in assets may increase the chance of a dividend cut at the largest U.S. bank.

The rescue package erodes the bank's capital buffer against loan losses, Bank of America analyst John McDonald wrote today in a report. The move adds pressure on the bank to reduce its quarterly 54-cent-a-share payment to investors, according to Meredith Whitney, an analyst at CIBC World Markets.

``The risks continue to mount for this already vulnerable financial giant,'' Whitney said today in a report. Citigroup's SIV plan ``will further imperil its fragile capital ratios going into the fourth quarter and surely pressure the company to continue to raise capital, sell assets and cut its dividend.''

Citigroup has tumbled more than 40 percent this year on the New York Stock Exchange as the collapse of the subprime mortgage market led to at least $9 billion of writedowns and potential losses at the seven ``structured investment vehicles.'' The New York-based bank's so-called Tier 1 capital ratio, which regulators monitor to assess Citigroup's ability to withstand loan losses, may fall to 6.8 percent by the end of the year from 7.32 percent on Sept. 30, McDonald at Bank of America wrote.

``It looks increasingly difficult for Citi to reach its capital targets'' by the middle of next year, when the bank says it hopes to return to its goal of a 7.5 percent ratio, McDonald said. Options may include ``potentially rethinking its dividend payout.''

Today Citigroup fell 31 cents, or 1 percent, to $30.70 at 4:17 p.m. in NYSE composite trading.

Rubin's View

Citigroup executives have said they intend to maintain the dividend, which some investors count on as a source of regular income. On a conference call this week, board member Robert Rubin, the former U.S. Treasury secretary who served as chairman following the Nov. 4 ouster of Charles O. ``Chuck'' Prince, said there was ``no real reason to think there will be a change'' in the dividend.

Yesterday's move by Pandit, who took over earlier this week, shows he isn't reluctant to reverse policies of prior management. As recently as Nov. 5, the bank said in a regulatory filing that it ``will not take actions that will require the company to consolidate the SIVs.''

Guy Moszkowski, the top-rated bank analyst according to Institutional Investor magazine, says the ``added strain on the balance sheet, together with the arrival of CEO Pandit,'' may lead Citi to change its dividend policy.

Stock vs Cash

The company may decide to temporarily pay the dividend in stock rather than cash, Moszkowski wrote today in a report. Doing so would allow Citigroup to retain capital at an annual rate of almost $11 billion, he wrote.

``The temporary nature of the change may forestall the amount of stock sales that would be provoked by an outright dividend suspension,'' Moszkowski wrote.

Citigroup said late yesterday that it will provide emergency backing to the SIVs to stave off credit-ratings downgrades that might have forced them to liquidate at a loss. The funds were set up to profit by issuing short-term and medium-term notes and investing the proceeds in higher-yielding securities.

Two hours after the bank's announcement, Moody's Investors Service lowered the bank's credit ratings to Aa3, the fourth- highest level, from Aa2, saying ``capital ratios will remain low.''

Moody's said Citigroup's credit rating has stabilized at the lower level because it has ``options for rebuilding its capital base,'' including selling assets and reducing the dividend.

Abu Dhabi

Last month, Citigroup had to obtain a $7.5 billion capital infusion from an investment fund controlled by the ruling family of the Middle Eastern emirate Abu Dhabi.

Citigroup followed HSBC Holdings Plc, Societe Generale SA and WestLB AG in bailing out SIVs to avert fire sales of assets. The funds, which sell short-term debt and invest the proceeds in higher-yielding securities, have cut their holdings by more than 25 percent since August to $298 billion, according to Moody's. The decline may reduce the urgency for a bailout sponsored by the U.S. Treasury, Citigroup, Bank of America Corp. and JPMorgan Chase & Co.

``That was really the last major outstanding piece of the SIV problem,'' said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of Money Fund Intelligence. ``The SIV problem is very close to resolution.''

Ratings Cut

SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1988 and was the biggest manager of the funds.

Charlotte, North Carolina-based Bank of America, the second-largest U.S. bank, said last week that it will liquidate a $12 billion fund after losses on holdings that included debt sold by SIVs.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody's. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt. Moody's said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.

``After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs,'' Pandit, 50, said in yesterday's statement.

Citigroup has reduced the assets of the SIVs to $49 billion, net of cash, from $87 billion in August. Last month, the company provided $7.6 billion of financing after the SIVs were unable to repay maturing debt.

`Wipe Away the Sins'

``It speaks to a change in leadership,'' Joshua Rosner, managing director at Graham Fisher & Co., whose New York-based firm analyzes structured finance and real estate investments. ``It speaks to a new management who can wipe away the sins, call them someone else's and start to heal.''

Citigroup Chief Operating Officer Robert Druskin, 60, announced his retirement yesterday, and Pandit picked Chief Financial Officer Gary Crittenden, 54, to lead an overhaul of expenses.

Citigroup didn't give details of how it will finance the assets other than to say it will provide a ``support facility'' that will be in place early next year. Junior-ranking SIV creditors will still bear the risk of first losses on the assets, providing a $2.5 billion cushion before senior bondholders suffer losses, the statement said.

Beta Finance

Citic Ka Wah Bank Ltd., a unit of China's biggest state- owned investment company, is among the lower-ranking investors in two of Citigroup's SIVs, Beta Finance Corp. and Five Finance Corp.

Citigroup's own ``credit exposure under its facility is substantially limited,'' according to yesterday's statement.

Pandit's decision was independent of Treasury's plan to create the $80 billion so-called SuperSIV that would buy assets from other funds that couldn't finance their investments, Citigroup said. The company said it ``continues to support'' forming that fund, which is being managed by BlackRock Inc. Treasury spokeswoman Brookly McLaughlin declined to comment other than to point to Citigroup's statement on the SuperSIV.

``The need now has completely gone away,'' said Joseph Mason, associate professor of business at Drexel University in Philadelphia and a former financial economist at the Office of the Comptroller of the Currency. ``They were the only ones keeping it alive.''

Moszkowski said today that Pandit's move to shore up its funds shows the bank was ``abandoning hope'' that the so-called SuperSIV would materialize by the end of the year.

``Citigroup clearly wants to avoid more reputational damage and a fire sale of securitized assets,'' Moszkowski wrote.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: December 14, 2007 17:55 EST