Analyst sees $8 billion Citi writeoff after Merrill move

By Tenzin Pema

BANGALORE (Reuters) - Citigroup Inc (C.N) may write down about $8 billion in the third quarter from its exposure to collateralized debt obligations (CDOs) after Merrill Lynch & Co MER.N agreed to sell its CDOs at a sharp discount, Deutsche Bank analyst Mike Mayo said.

The analyst also forecast a third-quarter loss and widened his 2008 loss estimate for Citigroup, the largest U.S. bank by assets.

On Monday, Merrill Lynch agreed to sell $30.6 billion of CDOs, a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just $6.7 billion, or about 22 cents on the dollar.

"We do think the CDO sale is large and diversified enough to be applicable to others with similar exposure and that the monoline settlements will pave the way for similar enough transactions," analysts at UBS said.

They said Citigroup has the largest exposure to both CDOs and monoline bond insurers, and that investors could expect further incremental write-downs in coming quarters.

On Monday, Merrill also said it would take a $5.7 billion third-quarter write-down as it unloads huge amounts of risky debt, and would raise $8.5 billion by selling new stock.

Citigroup has $22.5 billion of net CDO exposure, and based on Merrill's write-downs the New York-based bank could have another $7 billion of write-downs, Deutsche Bank's Mayo said.

The bank may also incur a $1 billion loss on its remaining $2 billion exposure to the bond insurers, Mayo added.

"Citi should still be able to absorb much of these charges and credit costs in general given an estimated $20 billion of second-half 2008 pre-provision, pre-tax earnings and the sale of its German retail business...but the decision about raising new capital could be closer than we previously thought," Mayo wrote in a note to clients.

Mayo cut his third-quarter estimate by $1 to a loss of 59 cents a share. For 2008, he expects Citigroup to post a wider loss of 80 cents a share, from a loss of 66 cents a share.

According to Reuters Estimates, analysts on average expect Citigroup to earn 26 cents a share in the third quarter. For 2008, they expect the bank to post a loss of 87 cents a share. Mayo maintained his "hold" rating on the stock.

MERRILL DEAL IMPACT

The fire-sale nature of Merrill's CDO deal will add to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.

"The read across of the new clearing price on ABS CDO (22 cents on the dollar) is causing stress tests everywhere. Of the US names we cover this has the largest impact on Citigroup," a note from a Merrill Lynch stock salesperson said.

Goldman Sachs analyst William Tanona agreed.