Citigroup capital under scrutiny

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - From the chatter heard on Wall Street, you'd think Citigroup Inc (C.N) was running out of money.

That's a stretch. But speculation that the largest U.S. bank might need to cut its dividend to boost relatively low capital levels is sending some shareholders to the exits.

The key concern: exposure to credit markets through $80 billion of structured investment vehicles, subprime mortgages and other assets. Analysts worry that SIVs might lose access to funding, forcing Citigroup to move assets to its balance sheet and tie up capital. They also worry of further write-downs for mortgages and other debt.

"We believe over (the) near term, Citigroup will need to raise over $30 billion in capital through either asset sales, a dividend cut, a capital raise, or combination thereof," wrote Meredith Whitney, an analyst at CIBC World Markets Corp.

Her downgrade of Citigroup to "sector underperformer" from "sector performer" spurred a Thursday decline of as much as 9 percent in shares of New York-based Citigroup.

The stock fell to its lowest level since May 2003, five months before Chief Executive Charles Prince took over.

Its decline dragged down broader stock indexes and boosted Treasury prices, and led to growing calls for Prince's ouster. This came after a $6.5 billion write-down for loan and credit losses led to a 57 percent drop in third-quarter profit.

Citigroup spokesman Mike Hanretta declined to comment. He said the bank does not discuss analyst reports, and that the board of directors is responsible for setting the dividend.

But analysts said that with a $2.7 billion quarterly dividend to pay, equal to 54 cents per share, Citigroup might have to consider asset sales or limiting trading activity, reducing potential for profitability.

"They're hoping the mortgage market and structured credit markets will come back to life," said Roy Smith, a professor at New York University's business school and former Goldman Sachs & Co. partner. "If they don't, Citi likely have to write down a lot of assets, and then you do get into issues of capital."

CAPITAL

The capital level is a measure that regulators use to ensure that banks have sufficient funds to cover losses.

According to the U.S. Federal Reserve, a "well-capitalized" bank must have a tier-1 capital ratio of at least 6 percent. Such a bank cannot normally pay dividends that would leave it undercapitalized.

Citigroup's capital ratio fell last quarter to 7.4 percent from 7.91 percent in the second quarter, and below its 7.5 percent target. In contrast, the tier-1 ratios were 8.22 percent at Bank of America Corp (BAC.N), 8.4 percent at JPMorgan Chase & Co (JPM.N), 7.2 percent at Wachovia Corp WB.N and 8.21 percent at Wells Fargo & Co (WFC.N).

The ratio of total capital to risk-adjusted assets at Citigroup was 10.7 percent in the third quarter. That's above the 10 percent regulatory requirement, but below the bank's internal 11 percent to 11.5 percent target, a person familiar with the matter said.