Deutsche Bank analyst Mike Mayo says that Citigroup will have to take an $8 billion write-down on CDOs after Merrill Lynch announced that it would sell off it’s CDOs for 22 cents on the dollar and write off $4.4 billion in value. This could force the firm to raise yet more capital, further diluting shareholders. Reuters:
Citigroup has $22.5 billion of net CDO exposure, and based on Merrill’s expected write-downs it could have another $7 billion of write-downs, analyst Mayo said. The bank is also likely to incur a $1 billion loss on its remaining $2 billion exposure to monoline bond insurers, he added.
“Citi should still be able to absorb much of these charges and credit costs in general given an estimated $20 billion of second-half 2008 pre-provision, pre-tax earnings and the sale of its German retail business … but the decision about raising new capital could be closer than we previously thought,” Mayo wrote in a note to clients.
Mayo is now anticipating a Q3 loss for Citi and cut his previous Q3 EPS estimate by a dollar to a -$0.59 loss. Mayo reiterated his Hold rating and dropped his FY08 EPS estimate from -$0.66 to -$0.80.