June 26 (Bloomberg) -- Citigroup Inc. and Merrill Lynch & Co. had their second-quarter estimates cut by analysts at Goldman Sachs Group Inc. and Sanford C. Bernstein & Co. on expectations the collapse of the subprime market will force them to take additional writedowns.

Citigroup, the biggest U.S. bank, fell to its lowest level since 1998 in New York trading after Goldman analyst William Tanona said the company may reduce the value of its assets by $8.9 billion. Sanford Bernstein's Brad Hintz cut his estimate for Merrill, the third-biggest securities firm, to a loss of 93 cents a share from a profit of 82 cents. New York-based Merrill dropped 6.8 percent to a five-year low of $33.05.

``The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,'' Tanona said. ``We see multiple headwinds.''

Goldman joined UBS AG and Merrill in predicting more writedowns for Citigroup, already reeling from $44 billion of credit-related losses. Citigroup Chief Executive Officer Vikram Pandit has announced 13,000 job cuts this year, and the bank this month forecast ``substantial'' additional writedowns and more losses on consumer loans.

Citigroup fell $1.18, or 6.3 percent, to $17.67 at 4:08 p.m. in New York Stock Exchange composite trading, the biggest drop in more than four months. Goldman, which was itself reduced to ``market perform'' from ``outperform'' by Wachovia Corp., declined $7.39, or 4 percent, to $176.26.

Lehman, Bank of America

All 11 members of the Amex Securities Broker/Dealer Index declined, led by Lehman Brothers Holdings Inc.'s 8.4 percent drop. Bank of America Corp., second behind Citigroup based on assets, fell $1.80, or 6.8 percent, to $24.81.

Goldman reduced its second-quarter estimate on Citigroup to a loss of 75 cents a share from profit of 25 cents. It also cut Merrill's estimate to a loss of $2 from earnings of 25 cents.

Tanona said ``deteriorating consumer credit trends'' will also hurt Citigroup profits. Rising unemployment and falling home values have crimped consumers' ability to pay back loans, including credit-card debt. American Express Co. CEO Kenneth Chenault said yesterday that credit indicators including late payments have worsened beyond the company's expectations.

Both Pandit and Merrill CEO John Thain have been in their jobs for less than seven months. Citigroup has tumbled 50 percent in New York trading since Pandit took over for ousted CEO Charles O. Prince in December. The firm lost $5.1 billion in the first quarter.

Thain's Tenure

Thain also became CEO in December, and the share price has dropped 44 percent since then. Merrill has reported three straight quarterly losses and writedowns totaling almost $18 billion.

Goldman lowered its rating on U.S. brokerages to ``neutral'' from ``attractive,'' saying the pace of deterioration in the industry ``appears to be far worse'' than it originally anticipated. ``We are hard pressed to find a catalyst that will move the group significantly higher over the next few months,'' Tanona wrote in the note.

Citigroup may write down $7.1 billion of collateralized debt obligations and associated hedges, and $1.2 billion for other asset classes, Tanona said. It also may need to post a $600 million loss to reflect the mark-to-market value of its own structured note liabilities, he said.

Sell List

Tanona cut his six-month price target for Citigroup to $16 and put the bank on Goldman's ``conviction sell'' list.

``The earnings outlook for the brokers remains bleak,'' Hintz at Sanford Bernstein wrote. ``The high margin businesses of investment banking are entering a cyclical slowdown.''

Citigroup probably won't be able to keep its current 7 percent dividend yield and may need to raise more capital, according to the Goldman report, which estimated Citigroup could generate $3.5 billion in capital a year by cutting payouts in half.

``Given the firm's current level of earnings power, we do not believe the dividend is safe,'' Tanona said. ``We believe any additional capital raises will be in the form of common equity, dividend cuts and or additional asset sales.''

Citigroup is more exposed to hedges on its leveraged loan and commercial mortgage-backed securities portfolios than Merrill and JPMorgan Chase & Co., indicating higher potential losses, Tanona said.

Citigroup Predictions

Merrill analyst Guy Moszkowski this week said Citigroup may post another $8 billion of writedowns this year. UBS analyst Glenn Schorr on June 20 said Citigroup probably will post a second-quarter loss of 40 cents a share after $8.7 billion of asset writedowns.

Wachovia analyst Douglas Sipkin sees Goldman's banking and prime brokerage business slowing, and ``big ticket'' capital raises also declining. Sipkin had upgraded the shares to ``outperform'' on March 18.

Sipkin cut his rating ``in light of recent economic fears, a likely slower pace of larger capital raises, seasonally slower prime brokerage revenues, and a 1.9x valuation,'' he wrote. ``Goldman Sachs is the leader in the space, in our view, but is not immune to weaker markets and likely lackluster summer conditions.''

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net.

Last Updated: June 26, 2008 16:11 EDT