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NEW YORK (
Citigroup(C - Get Report)'s
agreement to accept a lower valuation for its 49% stake in
Morgan Stanley(MS)Smith Barney is a "credit negative" for the bank, according to a report published Monday by Moody's Investors Service.
On Tuesday, Citigroup and Morgan Stanley settled a dispute over the valuation of the wealth management unit, in which Morgan Stanley owns the remaining 51% stake. The newly agreed-upon price resulted in Citigroup's stake being written down to $6.6 billion, some 40% less than where Citigroup had been valuing it. The result will be a $4.7 billion charge to Citigroup's third quarter earnings.
"The charge is credit negative and threatens Citigroup with a breakeven, or worse, quarter," writes Moody's analyst Sean Jones.
Jones noted, however, that the write-down "will have a minimal effect on Citigroup's regulatory capital ratios." He points to Citigroup's estimate that a closely-watched "Tier I" capital ratio under new rules known as Basel III ended the second quarter at 7.9%, "similar to that of most of its US peers."
Citigroup's bonds and common shares have both increased in price since Tuesday's agreement. Citigroup shares were up more than 8% over the past week shortly before noon on Monday, while yields on its 10-year bonds have fallen slightly even while yields on comparable 10-year Treasury bonds have climbed.
Written by Dan Freed in New York.
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