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Banks hit by sub-prime may need more cash

Dubai fund chief says much more is needed to rescue Citigroup, others

(DUBAI) Banks and securities firms led by Citigroup may need more money from Arab states as losses stemming from the collapse of the US sub-prime mortgage market increase, the head of Dubai International Capital said.

Citigroup, the biggest US bank by assets, received a US$7.5 billion cash infusion from Dubai’s neighbour, Abu Dhabi, on Nov 27 to replenish capital after record mortgage losses destroyed almost half its market value, leading to the departure of chief executive Charles Prince. Citigroup has since received cash from Singapore and Kuwait.

‘In my view it will take a lot more than that to rescue Citi and other financial institutions,’ Sameer al-Ansari told a private equity conference in Dubai yesterday.

Gulf states including Qatar, Kuwait and the United Arab Emirates have bought into US financial institutions such as Merrill Lynch & Co, Morgan Stanley and UBS, after they lost more than US$163 billion betting on securities backed by sub-prime mortgages.

Banks and securities firms have raised US$105 billion from selling stakes to cover sub-prime losses.

Qatari Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani said on Feb 18 that the emirate is buying shares in Credit Suisse Group and plans to spend as much as US$15 billion on European and US bank stocks over the next year.

Abu Dhabi is Citigroup’s largest shareholder, ahead of Los Angeles-based Capital Group Cos and Saudi billionaire Prince Alwaleed bin Talal, according to Bloomberg data.

State-managed funds in countries including Kuwait, Abu Dhabi and South Korea have ballooned to US$3.2 trillion in assets.

Fuelled by record oil prices and rising currency reserves, sovereign fund assets may gain four-fold to US$12 trillion by 2015, equal to the capitalisation of the Standard & Poor’s 500 Index, according to Morgan Stanley estimates.

Merrill Lynch & Co analyst Guy Moszkowski said that Citigroup will likely post a loss for the first quarter because the largest US bank by assets may take further ‘big writedowns’.

The analyst slashed his first-quarter estimate for Citigroup to a loss of US$1.66 per share from a profit of 55 cents a share. Mr Moszkowski cut his 2008 forecast to a profit of 24 cents a share from US$2.74.

The first-quarter estimate is based on an expected US$15 billion writedown related to sub-prime mortgages and so-called collateralised debt obligations, along with a US$3 billion writedown for other investments, Merrill said.

‘We remain concerned about loss provision potential, the direction of long-term strategy, and weak markets for the capital markets business,’ Mr Moszkowski wrote.

Citigroup posted a US$9.8 billion loss for the fourth quarter, the widest in its 196-year history, and wrote down CDOs linked to sub-prime mortgages by US$20 billion. The bank’s shares have tumbled 53 per cent in the past year.

Analysts surveyed by Bloomberg on average estimate that Citigroup will post a profit of 34 cents a share this quarter, excluding some items.

Merrill also cut its first-quarter profit estimate for Bank of America Corp, the second-biggest US bank by assets, to 58 cents a share from 94 cents. The brokerage trimmed its 2008 estimate for Wachovia Corp, the country’s fourth-largest lender, to US$2.50 a share from US$3.20.

Source: Bloomberg (Business Times 5 Mar 08)

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