Citi Detractors Roar

Shares tumble as a downgrade raises new questions about Prince.
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Citigroup

(C) - Get Report

dropped 7% after an analyst suggested the bank would have to cut its dividend or sell some assets in order to raise capital levels.

CIBC analyst Meredith Whitney cut her rating on the New York banking titan to the equivalent of a sell rating. According to a note, she is concerned that Citi's busy acquisition strategy in the last two years has taken away too much capital, which has not been replaced by earnings growth.

Citi shares hit a new 52-week low on Thursday, dropping $2.69 to $38.67. The downgrade fueled a selloff in the financial sector on Thursday. The Amex Securities Broker/Dealer index dropped 3.5%, while the KBW Bank Index slid 4%.

The selloff renews pressure on Citi's CEO Chuck Prince, whose lackluster performance has raised calls for his resignation. Prince and other financial industry CEOs who are perceived as underperforming -- such as

Bear Stearns

(BSC)

chief Jimmy Cayne -- have come under renewed scrutiny now that

Merrill Lynch

(MER)

has dumped CEO Stan O'Neal following an embarrassing $8 billion bad debt writeoff.

A Citi spokeswoman declined to comment.

"Since 2006, Citi has made $26 billion in acquisitions, taken over $6 billion in recent charges, and increased its dividend against a backdrop off almost no net income growth," Whitney writes. But Citi's tangible capital ratios have fallen to their "lowest level in decades," at just 2.8% of assets, compared to the average tangible capital ratio of 5% at other large banks, according to Whitney.

"For Citi to re-establish an average tangible capital ratio of over 4.25%, Citi will need to raise over $30 billion of equity," she writes. "To do that Citi could cut its dividend, raise capital, sell assets, or a combination thereof. ... We believe such a catalyst will pressure the stock."

Two weeks ago, Citi reported a 57% drop in third-quarter profit to $2.38 billion, or 47 cents a share. It took more than $3 billion in writedowns in the third quarter on its exposure to leveraged loan commitments, subprime mortgages and fixed-income trading. Citi's total credit costs jumped by $3 billion, as the bank recognized $780 million in credit losses and took a net charge of $2.24 billion to increase loan-loss reserves.

Credit Suisse also downgraded Citi to a neutral rating on Thursday.

Citi acknowledged in their latest earnings call that certain capital ratio levels were indeed lower, reflecting recent acquisitions and asset growth, but management said it expected capital levels to return to more normal levels next year.

Whitney said in a follow-up interview with

TheStreet.com

that it was likely that Citi would have to cut its dividend and sell assets at the same time.

"They have to

cut the dividend as the payout ratio exceeds 50%," Whitney said. Citi's earnings outlook "is not strong enough to support dividend. They have to do this."

Not all analysts are concerned with Citi's capital levels.

Citi's "net free cash flow in the first nine months was an estimated $18 billion," says Richard Bove, an analyst at Punk Ziegel. Cash flow could potentially rise to $24 billion this year and $27 billion next year, Bove writes in a note. "These numbers do not suggest that the company is strapped for cash or lacking in equity."