Goldman analyst William Tanona cuts estimates on Citigroup (C) despite Citi’s better than expected Q2 results last week. Tanona cites a deteriorating credit environment and Citi’s still extensive exposure to mortgage-related assets, which he thinks will raise credit costs and force more costly writedowns:
Despite better-than-expected results, we remain concerned about the firm’s aggregate exposure to ABS CDOs, leveraged loans, and residential and commercial mortgages. Furthermore, credit quality trends
continue to deteriorate, which is also going to be a major headwind for the company over coming quarters.
Tanona goes on to suggest that Citigroup’s stronger results were almost exclusively the result of smaller-than-expected writedowns in CDOs in its Investment Banking group. That said, he noted the deterioration in the credit enviornment wasn’t as bad as expected:
All things considered, it was a decent quarter for Citigroup. The consumer businesses continued to show deterioration in credit statistics, as we expected. However, results were not as bad as investors had expected. Net credit losses for the North America consumer segment were 3.25% in 2Q2008, up from 2.56% in the prior quarter. Overall net credit losses of $4.42 bn were 5% greater than our forecast, and the provision expense of $7.19 bn exceeded our estimate by 12%.
Tanona maintained his Sell as well as his $16 price target. 2008, 2009, and 2010 EPS go to -$1.10, $2.10, and $3.00 from -$1.20, $2.40, and $3.20.