UPDATE 3-Goldman says sell Citigroup, buy Morgan Stanley

(Recasts, adds details, background, updates share movement)

BANGALORE, Oct 21 (Reuters) - Citigroup may not be profitable over the next 12 months, said a Goldman Sachs analyst, who recommended a "paired" trade in which investors short the bank's stock C.N and buy Morgan Stanley MS.N shares.

Shares of Citigroup, the giant U.S. bank, fell as much as 10 percent to $13.64 following the report. Morgan Stanley shares rose as much as 9 percent, but later pared some of the gains to trade up about 3 percent.

“We believe weak economic data will keep the (Citigroup) stock under pressure over the next six months and it is tough to see why the stock would head higher over this period,” analyst William Tanona wrote in a note to clients.

Adding Citigroup to Americas Conviction Sell list, Tanona said it will be difficult for the company to generate profitability over the next 12 months primarily due to additional write-downs and deteriorating credit market.

Tanona, who reinitiated a “buy” on Morgan Stanley, said the company has very limited exposure to consumer credit, which is an area the brokerage believes will provide the most significant headwinds for Citigroup in 2009.

Morgan Stanley will generate profits over the next four quarters, thus adding to its capital base, whereas Citigroup will lose money, thus reducing its capital base, Tanona said.


Even as Tanona expects government investment to help the company’s overall capital position, he does not see Citigroup returning to profitability until the second half of 2009.

Tanona has a six month price target of $11 on Citigroup.

Citigroup, the nation’s largest bank by assets until the third quarter, posted its fourth straight quarterly loss and $13 billion of write-downs and credit losses, driven by housing and credit market turmoil.

The company has not only been hit by rising losses from its traditional lending operations, but also by slowing profitability from emerging markets and its stock has lost 64 percent of its value over the past one year.

In a note dated Oct. 16, Merrill Lynch analyst Guy Moszkowski had said Citigroup’s negative credit outlook was enhanced by tough investment banking environment.

Moszkowski had earlier raised Morgan Stanley to “buy” from “neutral” and said that even in a recessionary 2009, the company should be able to produce return on equity near 10 percent.

For the third quarter, Morgan Stanley’s profit beat expectations, helped by robust equity and commodities trading results and record prime brokerage fees.

Shares of Citigroup were trading down 5.7 percent at $14.23, while those of Morgan Stanley were trading up 3.34 percent at $20.42 in afternoon trade the New York Stock Exchange. (Editing by Dinesh Nair, Deepak Kannan)


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