By Elizabeth Hester and Adam Haigh
Dec. 27 (Bloomberg) -- Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, according to Goldman Sachs Group Inc.
Citigroup, the biggest U.S. bank, may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40 percent, Goldman analyst William Tanona said in a Dec. 26 report on the New York-based companies. JPMorgan Chase & Co., the third-largest U.S. bank, may write off $3.4 billion, double Goldman's previous estimate. Merrill Lynch & Co. may reduce its holdings by $11.5 billion, he wrote.
Losses and writedowns at the world's biggest banks and securities firms total $97 billion this year, according to data compiled by Bloomberg. The market for collateralized debt obligations, loans packaged into new securities, has dried up after surging subprime mortgage defaults led to rating downgrades and convinced many investors to buy only the safest debt.
``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 Citigroup's stock and a ``neutral'' rating on JPMorgan and Merrill. ``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.''
Tanona downgraded Citigroup's shares on Nov. 19 and was the last of six analysts who follow the company to advise clients to sell the stock. Nine analysts rate Citigroup a ``buy'' while eight recommend holding the stock, according to Bloomberg data.
Citigroup, which has fallen 47 percent this year, dropped 89 cents to $29.66 on the New York Stock Exchange at 4 p.m. JPMorgan, down 9.7 percent this year, fell $1.30 to $43.64. Merrill Lynch declined $1.34, or 2.5 percent, to $53.20.
Citigroup is trying to preserve capital after reporting a 57 percent drop in earnings for the third quarter and forecasting as much as $11 billion in losses and writedowns in the fourth quarter. The New York-based bank, which pays a 54-cent dividend, will have to raise $6.2 billion to meet its capital needs, according to Tanona.
Citigroup Chief Executive Officer Charles O. ``Chuck'' Prince III stepped down last month and the bank 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.
Citigroup tumbled 8.1 percent on Nov. 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.
The company pays a dividend equal to 7.1 percent of its stock price, more than twice the 3.3 percent yield of the average financial stock in the Standard & Poor's 500 Index. Executives have said they intend to maintain the payout.
Citigroup, which picked former Morgan Stanley investment banker Vikram Pandit to succeed Prince, will still have about $24.5 billion in CDO investments after the writedown, Goldman said.
Tanona previously had estimated that Merrill, which replaced CEO Stan O'Neal with John Thain, would have to write down $6 billion of securities.
``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.''
Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a note dated today that Merrill will have a CDO-related writedown of $10 billion in the fourth quarter.