Citi Faces More Pain

More debt-related reckoning may be in the wings for banks such as Citigroup(C Quote - Cramer on C - Stock Picks).

Oppenheimer & Co. financial analyst Meredith Whitney cut Citi's 2008 earnings estimate to 75 cents from $2.70. She said the New York-based banking conglomerate may suffer further damage from writedowns in consumer and leveraged lending and funky subprime mortgage securities that it has housed on its balance sheet during a period of diminishing confidence in credit.

Whitney estimates that an "intensely challenging" earnings environment for Citi will see its shares fall to about $16, around 34% below its current market price. The analyst has an underperform rating on the stock.

"We believe loss rate acceleration is currently grossly underestimated by consensus estimates," Whitney writes. "As core fundamentals are rapidly deteriorating, liquidity has been choked, and recovery rates are in the process of dropping to historic proportions, we expect loss rates for the banking group to exceed those on record."

Shares of Citi closed down 1.5% to $24.75.

Back in November, Whitney downgraded Citi to sector underperform from sector outperform and speculated that the bank would have to raise as much as $30 billion and cut its dividend to shore up its balance sheet.

So far, Citi has written down some $18 billion in subprime loans and other deflated securities in the fourth-quarter.

For Citi and others such as Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) and UBS(UBS Quote - Cramer on UBS - Stock Picks), flagging confidence in credit has made the outlook for business on Wall Street bleak.

Moreover, financial guarantors Ambac Financial(ABK Quote - Cramer on ABK - Stock Picks) and MBIA(MBI Quote - Cramer on MBI - Stock Picks) are also posing additional strife for banks. Downgrades at those companies, which insure municipal debt as wells as some of the structured paper that banks hold on their books, could force financials to record greater losses.

Peter Goldman, portfolio manager at Chicago Asset Management, which holds long positions in Citigroup, said that he is heartened by the bank's ability to raise cash and thinks that financials may yet weather the storm.

"My [long-term] view is that they're gonna muddle through this, but they've shown the ability to obtain financing," he noted

Still, the precarious financial footing of these firms is not leaving everyone feeling confident.

On Monday, Fitch Ratings said that bank exposures, while manageable for the financial sector, "could lead to additional ratings pressure for Citigroup, Merrill Lynch and UBS." Those firms have been the most prolific underwriters of esoteric mortgage securities known as collateralized debt obligations, or CDOs. Another Whitney research report issued earlier in the month, highlights the same point, suggesting that the trio could see an additional $70 billion in writedowns if guarantors falter.

"While these institutions have recently raised sizable capital, additional writedowns may put incremental pressure on their ratings when combined with other financial challenges, Fitch's report reads.

Goldman Sachs on Monday also took a more negative view on Citi. An analyst at the firm downgraded the bank to sell from neutral, and said it may write off $15 billion over the next two quarters as mortgage losses eat into earnings.