What's the Matter with Citi?

Among the worries: mounting loan losses, dicey credit markets, and the possibility the company will have to scramble for more capital

Just a year ago it was the world's biggest bank, but today Citigroup (C) faces the humbling prospect of again going out to beg for more capital.

At one point on Mar. 4, Citi shares had dropped 8%, to their lowest level in almost a decade. One reason for the stock's plunge: Analysts at Merrill Lynch (MER) and elsewhere added to the chorus of worries about Citi's wobbly financial situation.

Alarms were also raised by a speech from the Mideast, where Citi has already raised billions from sovereign wealth funds. An insider in the world of oil-rich investing, Sameer Al Ansari, suggested Citi would need to even more capital to stay afloat.

Citi has already raised almost $30 billion in an effort to heal the damage from the credit crisis. And executives reportedly said Mar. 4 that they are confident in the company's capital levels and aren't seeking more funds.

But Ansari, the CEO of Dubai International Capital, insisted Citi must do more. "It's going to take more than that to rescue Citi," he said, according to Dow Jones.

Citi's bleeding from the credit crisis won't seem to stop. This quarter alone, Merrill's Guy Moszkowski expects Citi to record another $15 billion in losses from subprime-related debt, and another $3 billion from other troubled loans and investments.

Citi won't announce first quarter earnings until Apr. 18, but in recent weeks analysts have turned sharply pessimistic about the 2008's profits.

Moszkowski now expects a first quarter loss of $1.66 per share, vs. a 55-cent profit previously, and full-year earnings of just 24 cents per share.

Also on March 4, Standard & Poor's equity analysts lowered profit expectations for Citi to earnings of $1.05 per share for the full year, from $2.99. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.) And, Goldman Sachs (GS) changed its first-quarter estimate to a loss of $1 per share, from earnings of 15 cents, attributing the change to a math error -- "a miscalculation in our model."

So what is the matter with Citi?

The list of problems is long, though nearly all stem from the credit and housing crises. Merrill's Moszkowski cites the "vicious" decline in home prices and the "continued deterioration in U.S. residential and commercial mortgage markets, corporate debt markets, and key investment-banking categories."

Citi's Japanese consumer finance business is having trouble, but the international bank's main troubles are in the U.S. American consumers are having a tougher time meeting credit obligations, especially mortgages, causing loans on Citi's balance sheet to turn bad at a faster pace.

"Underlying conditions are extremely weak," Moszkowski wrote Mar. 4.

As it faces heavy losses from the credit crisis, one option for Citi is to go begging for more money from investors like sovereign wealth funds. But such capital-raising can significantly dilute current shareholders' stakes.

So, other options including cutting costs and selling off assets. An unconfirmed report from CNBC on March 4 said Citi could cut 30,000 or more jobs in the next year and a half, about 8% of its workforce of 374,000.

Oppenheimer's (OPY) Meredith Whitney, one of the Citi's most pessimistic (and, so far, correct) analysts, thinks Citi could be forced to sell up to $100 billion in assets. That's difficult to do while markets suffer from credit turmoil. "Under duress, [Citigroup] will likely be forced to sell what it can and not what it should," Whitney wrote Feb. 25. She also worries Citi may need to again cut its dividend—after the stock's recent decline the dividend yield stands at a relatively generous 5.4%.

While analysts aren't questioning Citi's long-term survival, few expect an easy road ahead, especially if the credit crisis doesn't ease and loans continue turning sour.

As Credit Suisse (CS) analyst Susan Roth Katzke wrote recently, "This is no easy fix, even for the best of managers."

But how bad could things really get? After all, Citi stock is already trading at the lowest level in recent memory. On Mar. 4, Citi stock closed down 4.3% to $22.10 per share, after hitting a 52-week low of $21.23 during the trading session. Shares have lost 56% of their value a year ago.

Keefe, Bruyette & Woods (KBW) analyst Diane Merdian recently calculated a "worst-case scenario," which she places at a 10% probability of actually occurring. If Citi had to write off all of its subprime and other risky debt, it would take a $32 billion pretax hit, she figures, and Citi might need to raise another $20 billion in capital. That could cut Citi's share value to $15.19.

That's another hit of more than 30%. Investors may continue running away from Citi's stock until they get signals—either from the credit markets or from Citi executives—that their worst nightmares won't come true.

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