Citigroup may cut dividend by 40%: Goldman

Citigroup Inc, the biggest US bank, may have to cut its dividend by 40 per cent to preserve capital after writing down more fixed-income securities in the fourth quarter, according to Goldman Sachs Group Inc analysts.

The New York-based bank may write off $18.7 billion in collateralised debt obligations, compared with Citigroup's estimate of as much as $11 billion, Goldman analysts including William F Tanona wrote in a note dated December 26. Citigroup, which paid out 54 cents each quarter this year, will have to raise $6.2 billion in additional capital to reach its target, they wrote.

"It will be a couple of quarters before the current credit crisis is fully digested by the markets,'' wrote Tanona, who has a "sell'' rating on the stock. "Given the magnitude of the writedowns we assume and Citi's remaining exposure, we believe the firm has a serious need to preserve or raise additional capital.''

Citigroup forced Chief Executive Officer Chuck Prince to step down last month and got a $7.5 billion investment from Abu Dhabi's sovereign wealth fund after predicting further losses. Writedowns at the biggest banks are still likely to be "significantly larger than investors are anticipating,'' Tanona wrote, doubling his estimates for charges at New York-based JPMorgan Chase & Co and Merrill Lynch & Co.

Citigroup tumbled 8.1 per cent in New York trading on November 1 after CIBC World Markets analyst Meredith Whitney said it may have to trim its dividend. Deutsche Bank AG analyst Michael Mayo also predicted a dividend cut, saying the investment from Abu Dhabi is ``probably not enough'' to absorb credit losses.

Dividend yield
The company pays a dividend equal to 7.1 per cent of its stock price, more than twice the 3.3 per cent yield of the average financial stock in the Standard & Poor's 500 Index. Executives have said they intend to maintain the payout even after the shares tumbled 45 per cent this year.

The biggest financial institutions have had to mark down more than $80 billion after a surge in US subprime mortgage defaults prompted investors to shun higher-risk debt. Citigroup, which picked former Morgan Stanley President Vikram Pandit to succeed Prince, will still have about $24.5 billion in CDO investments after the writedown, Goldman said.

Goldman analyst Tanona estimated that JPMorgan, the third-biggest US bank, may have a CDO-related writedown of $3.4 billion in the final quarter, up from a previous estimate of $1.7 billion. Merrill, which replaced CEO Stan O'Neal with John Thain, may write off $11.5 billion, compared with an earlier estimate of $6 billion, Tanona said in his note.

"Many of the December year-end firms are likely to be more aggressive with their marks,'' Tanona wrote. "Particularly those with high levels of exposure such as Citi and Merrill Lynch, both of whom have new CEOs at their helms.''