Merrill Cuts Citigroup Rating, Shares Drop

Citigroup Inc. (C) shares fell Monday after a prominent Wall Street analyst downgraded the world's largest financial services company, citing a string of recent ethics problems. Analysts say the blows to Citigroup's reputation might be a function of the New York-based giant's size and far-flung businesses.

The downgrade by Merrill Lynch & Co. (MER) analyst Guy Moszkowski to "neutral" from "buy" came after Japanese regulators last week ordered Citigroup to shut down its private bank in Japan. This followed violations including the failure to prevent suspected money laundering and lax customer account monitoring.

Japanese regulators also said the company misled clients in some private bond placements last year.

In addition last week, Citigroup said it regretted making an 11 billion euro ($13.3 billion) bond trade that caused turmoil in European bond markets.

Shares of Citigroup, a Dow Jones industrial average (search) component, fell $1.26, or 2.68 percent, to $45.69 on the New York Stock Exchange (search), just above the day's low of $45.66.

Citigroup Chief Executive Charles Prince has been trying to keep the company name out of negative headlines. In May, when the bank took a $4.95 billion charge for lawsuits involving such companies as Enron Corp. (search) and WorldCom Inc. (search) , Prince said: "I want to put the entire era behind us."

But Moszkowski wrote that "making the changes needed at the operating unit level to balance growth and ethics will continue to be a hard, slow process."

"We can't help but worry that these important efforts will dampen revenues and raise costs in key businesses over the near term," he added.

Citigroup in 2003 earned $17.9 billion on revenue of $77.4 billion, which exceeds the gross domestic products of Chile, New Zealand and Pakistan, according to World Bank (search) data.

"The question remains whether the financial, operating and reputational issues as part of the recent investigations are simply a part of doing business for such a complex firm," wrote Prudential Financial analyst Michael Mayo, who has a "neutral weight" rating for Citigroup.

As of Monday's downgrade, 13 of 16 Citigroup analysts recently polled by Reuters Research had rated the company a "buy" or "outperform."

Moszkowski said the action by Japanese regulators might reduce Citigroup profit only slightly, but "clearly puts a damper" on growth at the company's private bank, whose second-quarter profit rose 9 percent from a year earlier to $152 million.

"Issues of ethical standards and control continue to compromise Citi's image with customers and governments," Moszkowski said. "The long-term opportunity and franchise strength remain very strong if management is successful in addressing these issues."

Citigroup also faces a Securities and Exchange Commission (search) investigation into its accounting for business in Argentina in 2001 and 2002, when it took nearly $2.2 billion of charges related to that country.