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

By Tenzin Pema

BANGALORE (Reuters) - Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), 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: Quote, Profile, Research, Stock Buzz) and South Financial Group Inc (TSFG.O: Quote, Profile, Research, Stock Buzz) to "overweight" from "equal-weight." They also upgraded First Horizon National Corp (FHN.N: Quote, Profile, Research, Stock Buzz) and Huntington Bancshares Inc (HBAN.O: Quote, Profile, Research, Stock Buzz) to "equal-weight" from "underweight."