(Adds information on Citigroup's discussion with Treasury on rules governing deferred tax assets.)
By Marshall Eckblad and David Enrich
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Whether you believe Citigroup Inc. (C) will face fourth-quarter write-downs on complicated tax assets depends on which analyst you most believe.
Calyon Securities analyst Mike Mayo, working with well-known accountant Robert Willens, deepened concerns Friday that the New York bank could face write-downs on complicated assets, known as deferred tax assets, that banks can book when they post quarterly losses.
"Our expert accountant expects Citigroup to have a $10 billion...valuation adjustment" in the bank's fourth-quarter results, said Mayo, in a note to investors Friday. Mayo's expert, Willens, when reached at his office, said he stands behind the report. Such a write-down could affect Citi's levels of capital.
Citigroup tried to shrug off Mayo's estimate. "We have no idea how any analyst could have come to this estimate," Citigroup spokesman Steve Cohen said.
An accounting expert working with Morgan Stanley (MS) analyst Betsy Graseck agreed with Citigroup; Graseck said fears of a write-down are overblown.
Meanwhile, Citigroup executives this fall have been talking with Treasury Department officials about the company's DTA, according to people familiar with the matter. The Treasury talks don't involve the questions that Mayo raised Friday about whether Citigroup has enough earnings power to justify its huge DTA, the people said.
Citigroup executives have been trying to make sure that their DTA wouldn't have to be written down due to a "change in control" at the company. Such an event could be triggered if Citigroup's largest shareholders, including the Treasury, which owns 34% of Citigroup's outstanding shares, unloaded big chunks of their holdings, the people said.
The discussions have taken place at the same time that Citigroup and Treasury officials have discussed the possibility of the government starting to whittle down its stake in the company, these people said.
In a note to investors Friday afternoon, Morgan Stanley's Graseck said her expert, unlike Mayo's, doesn't come to the conclusion that Citi's deferred tax assets need to be written down.
She said Tony Catanach, an accounting professor at Villanova University and formerly an audit manager at accounting firm KPMG, "does not come to the conclusion that Citi's deferred tax assets needs to be written down."
"The selloff in Citi stock, based on probability of [a] deferred tax assets write-down, is overdone, in our opinion," Graseck wrote in her note.
Citigroup shares closed down 5.1% to $4.09 in composite trading Friday.
When lenders and financial firms book quarterly losses, as many have repeatedly done during financial crisis, they are allowed to book credits against tax bills they will face in the future once they return to profitability. Portions of those complex assets, known as deferred tax assets, or DTA, can be added to firms' capital, which serves as an assurance against losses for depositors, and serves as protection against dilution for current shareholders.
Synovus Financial Corp. (SNV) and South Financial Group Inc. (TSFG) each reported write-downs of more than $100 million on deferred tax assets earlier this month. Analysts are growing concerned that other firms could also soon face write-downs on DTA.
The Federal Reserve is currently reviewing rules over how much of each bank's DTA can be counted toward a bank's Tier 1 capital, a measure regulators use to gauge lenders' financial health.
Until the current rules change, some analysts have sounded warning bells that some banks, including beleaguered Citigroup, which has been rattled by the financial crisis, could soon be forced to write down the value of its deferred tax assets.
To hold the assets, bank managers must forecast their future profits. Reductions in future earnings forecasts, or tripping over other complex rules that govern the assets, can trigger write-downs.
After suffering tens of billions of dollars in write-downs in recent years, Citigroup as of Sept. 30 was sitting on roughly $38 billion in deferred tax assets. The company said earlier this month that about $13 billion of those deferred tax assets counted toward Citigroup's Tier 1 capital.
Investors this week have been growing increasingly jittery about whether Citigroup would have to take a write-down to reflect the diminished value of the DTA. Even before Mayo published his note on Friday, Citigroup investor-relations officials on Tuesday and Wednesday fielded a flurry of phone calls from investors with questions about the assets and whether they would be written down. Such concerns may have helped drive down Citigroup's stock price earlier in the week.
"Over the last few weeks, I've been getting an increasing number of questions on deferred tax assets," Ken Zerbe, an analyst at Morgan Stanley, said during a conference call Friday.
Another Citigroup official said the company is confident in its ability to earn enough over the next 20 years to warrant the current size of the DTA. This official said Citigroup's outside auditor, KPMG, has signed off on the company's third-quarter DTA.
-By Marshall Eckblad, Dow Jones Newswires,; 212-416-2156; marshall.eckblad@dowjones.com
(David Enrich of The Wall Street Journal contributed to this article.)