Moody's Investors Service downgraded Citigroup's ( C) long-term debt ratings by a notch to Aa3 from Aa2, saying it believes the financial giant's capital ratios will remain low.
The move came after Citi said it would move seven troubled structured-investment vehicles on to its balance sheet. Moody's also lowered the bank financial strength rating of Citibank N.A. to B from A-. The rating on Citibank for long-term deposits and senior debt was dropped to Aa1 from Aaa. The rating outlook is stable. Citi will probably need to take "sizable" writedowns against its subprime residential mortgage-backed securities and collateralized debt obligation portfolio, Moody's analyst Sean Jones said in a statement late Thursday. "During 2008, Citigroup's weak earnings should prohibit the bank from rapidly restoring capital ratios, despite its recent issuance of $7.5 billion hybrid capital," Jones said. Moody's believes Citi could rebuild its capital base by seeking additional sources of external capital, more aggressive balance sheet management and by cutting its dividend. For Citi's ratings to be upgraded, "the company would need to rebuild its capital ratios to levels maintained prior to 2007. As well, the firm's pre-provision earnings power has to return to its previous strong level, while reducing its concentration risks," Moody's said. If it doesn't restore its ratios in the medium term, Citi could be facing a further downgrade. Additionally, several Citi units were placed on review for possible downgrades, including Citibank Europe Plc, Citibank International Plc, Nikko Citigroup Ltd. and Citibank Japan Ltd.