Bloomberg reports that analysts at Sanford Bernstein estimate that Citi will suffer up to $3 billion in losses this quarter due to subprime and LBOs writeoffs:
The New York-based company may lose between $1.2 billion and $1.5 billion on loans to buyout firms and between $500 million and $1 billion on subprime mortgages in the three months ending Sept. 30, Bernstein analysts Howard Mason and Michael Howard said today in a note to clients.
Banks may have marked down between 15 percent and 20 percent of the value of leveraged loans in July, and Citigroup could have marked down around $200 million to $300 million that month, the analysts said. The average extra-risk premium, or spread, that investors demand on loans to buyout firms buying companies with debt rose about 300 basis points in July, the analysts wrote.
Note that while these losses sound dramatic, Citi earned $5.5 billion in the third quarter of 2006, so unless their other businesses fall out of bed, these writedowns will merely cut into profits rather than reduce the bank’s capital base. Citi is also a fairly minor player in the hedge fund business (both as a fund manager and prime broker) so it does not have much exposure on that front. The Bernstein team has an “outperform” rating on the stock.