Citi may take $7 billion more in writeoffs: Morgan Stanley

BANGALORE (Reuters) - Citigroup Inc (C.N), the largest U.S. bank by assets, will likely take a further $7 billion in collateralized-debt obligations writedowns this year and raise $11 billion in capital, said analysts at Morgan Stanley, even as they removed their 20 percent dividend cut forecast for the bank.

Shares of the New York-based bank fell as much as 6 percent to $19.94 in late morning trade on the New York Stock Exchange, despite an upgrade on the stock by analysts Betsy Graseck and Ken Zerbe.

The analysts upgraded Citigroup to "equal-weight" from "underweight," saying improved liquidity in the market will enable the bank to further reduce legacy and risky assets at low to no losses.

Analysts Graseck and Zerbe also upgraded the U.S. large and mid-cap banks sectors to "in-line" from "cautious," partly due to net interest margin expansion and fiscal stimulus.

The analysts also said banks were benefiting from owning the loans, as they give more time to their direct borrowers to work out their problems.

"The optimists say this will drive fewer losses as a portion of the borrowers will cure. The pessimists say this is just putting off problems to the future. We say banks will continue to do this throughout the cycle, keeping losses well below losses seen in securitization trends," the analysts wrote.

They, however, continue to expect further credit deterioration in coming quarters based on declining home values.

Graseck and Zerbe upgraded Webster Financial Corp (WBS.N) and South Financial Group Inc TSFG.O to "overweight" from "equal-weight." They also upgraded First Horizon National Corp (FHN.N) and Huntington Bancshares Inc (HBAN.O) to "equal-weight" from "underweight."

The analysts, however, downgraded Associated Banc-Corp (ASBC.O) and TCF Financial Corp (TCB.N) to "underweight" from "equal-weight," and cut their rating on NewAlliance Bancshares Inc NAL.N to "equal-weight" from "overweight."

BANK OF AMERICA

Analysts Graseck and Zerbe raised their "underweight" weighting on Bank of America Corp (BAC.N) by 0.3 percent to 3.5 percent.

They also forecast a $12 billion dilutive common stock issue in the fourth quarter for the largest U.S. retail bank and mortgage lender.

"We look for Bank of America's acquisition of Countrywide Financial Corp, and its large exposure to consumer loans, to result in higher base case cumulative losses of 8 percent on its portfolio," the two analysts said.

CITIGROUP

Citigroup, one of the hardest hit in the year-long global credit crisis, has less mortgage exposure than peers Wachovia Corp WB.N and Wells Fargo & Co (WFC.N), Graseck and Zerbe said.

The analysts said Citigroup also plans to reduce its mortgage book by $45 billion this year, adding that better market liquidity has enabled the company to reduce its exposure to assets by $99 billion.

They also expect Citigroup to post higher topline growth, based on higher net interest margins and trading revenues.

CAPITAL/WRITEDOWN ESTIMATES

Analysts Graseck and Zerbe forecast further capital raising at Huntington and TCF Financial, but said Webster and South Financial Group will not need to raise any additional capital.

The analysts expect TCF Financial to raise $120 million of capital, while Huntington is expected to raise roughly $450 million in capital to fully absorb potential credit losses.

Huntington is also expected to write down part of its $1.1 billion exposure to Franklin Credit Management later this year. "Our best estimate is a $250 million writedown in the third quarter," the two analysts said.

Shares of Bank of America were trading down about 2 percent at $32.90, while those of Webster were up more than 5 percent at $19.50 in late morning trade on the New York Stock Exchange. Huntington shares were down about 7 percent at $7.12 on Nasdaq.

The KBW Bank Index .BKX was down 3.2 percent to 66.16 points.

(Editing by Jarshad Kakkrakandy)