Citigroup Inc's stock fell sharply on Monday as investors wonder how much more cash the troubled bank will need.
Citigroup Inc, in an effort to raise capital, is hammering out a deal to sell the bulk of its retail brokerage to Morgan Stanley.
The joint venture - expected to be announced later this week - would lead to an after-tax gain for Citigroup of about $US5 ($A7.14) to $US6 billion ($A8.57 billion), a person close to the negotiations said on Monday.
The person spoke on condition of anonymity because he was not authorised to discuss the ongoing talks.
But maintaining cash levels that are high enough to make up for upcoming losses remains a big challenge for Citigroup.
"While we believe this deal will provide some near-term capital relief, more likely will be needed," Meredith Whitney, a financial analyst at Oppenheimer & Co, wrote in a note on Monday.
Citigroup stock fell 72 cents, or 10.7 per cent, to $6.04 on Monday, even though most industry analysts were positive about the deal. Lauren Smith at Keefe, Bruyette & Woods said in a note that the potential joint venture "seems like a win-win to us."
Morgan Stanley shares rose 89 cents, or 4.7 per cent, to $19.95.
Citigroup lost more than $US20 billion ($A28.56 billion) between October 2007 and October 2008, and is expected to post another deficit for the final quarter of last year when it reports those results next week. The government has already loaned Citigroup $US45 billion ($A64.25 billion), and agreed to absorb the losses on a huge pool of mortgages and other assets.
Morgan Stanley - which got $US10 billion ($A14.28 billion) in government financing - is likely to pay Citigroup between $US2 billion ($A2.86 billion) and $US3 billion ($A4.28 billion) in cash for a 51 per cent stake in Citi's brokerage, Smith Barney, the person close to the talks said. In total, after accounting for the revaluation of Smith Barney, Citigroup would get a pre-tax gain of $US10 billion ($A14.28 billion), or $US5 billion ($A7.14 billion) to $US6 billion ($A8.57 billion) after taxes, the person said.
Morgan Stanley would then have the option to buy the rest of Smith Barney over the next three to five years, the person said. The joint venture between Smith Barney and Morgan Stanley's retail brokerage, the former Dean Witter, would employ a team of more than 20,000 and rival Bank of America Corp's Merrill Lynch in size.
A fruitful merger could take a while, though.
"We expect that it will take three years to successfully merge these operations together, and in the meantime the retail business will face a severe downturn," wrote Brad Hintz, senior analyst at Bernstein Research.
Morgan Stanley did post a $US2.37 billion ($A3.38 billion) loss during its fiscal fourth quarter, which ended Nov 30. But Morgan Stanley's woes have not been of the same magnitude as Citi's.
Banking regulators are now pushing Citi to replace its chairman, Sir Win Bischoff, in an effort to restore confidence in the New York-based bank after it needed billions of dollars in government support, according to a New York Times report. The Times and The Wall Street Journal said Monday that Richard Parsons, former CEO of Time Warner Inc and a Citi director, is likely to succeed Bischoff.
Citi could report an operating loss as large as $US10 billion ($A14.28 billion) during the fourth quarter, according to the report in the Journal. About $US4 billion ($A5.71 billion) of the loss would be offset though by a gain from the bank's sale of its German retail banking operations in a deal that closed late last year, the newspaper said.
Citigroup declined to comment Monday on the newspaper reports.
Analysts polled by Thomson Reuters, on average, forecast a loss of $1.14 per share for the fourth quarter. Based on Citi's outstanding share count as of Sept 30, that would equate to a loss of about $US6.21 billion ($A8.87 billion). Analysts do not always include special one-time gains in their estimates.
