NEW YORK (Reuters) - Citigroup Inc <C.N> confirmed it is in talks with Morgan Stanley <MS.N> about merging their brokerage operations.

Shares of Citigroup, meanwhile, came under renewed pressure on worries that credit losses will increase substantially, reducing earnings and eating into capital.

In a sparse statement on Tuesday, Citigroup said it is holding discussions about combining its Smith Barney brokerage with Morgan Stanley's wealth management business. It said no agreement had been reached.

News of the talks first surfaced on Friday.

Citigroup is expected to have a 49 percent stake in the brokerage joint venture and receive a payment in excess of $2.5 billion from Morgan Stanley, according to people familiar with the talks. Morgan Stanley is expected to buy all of Citigroup's stake within a few years, they said.

In addition, Citigroup could boost capital by writing up the value of its own brokerage business, they said.

Shares of Citigroup, a Dow Jones industrial average <.DJI> component, fell 22 cents, or nearly 4 percent, to $5.38 in morning trading. The shares had fallen 17 percent on Monday.

Earlier Tuesday, the shares fell to $5.07, their lowest level since Citigroup won a November government rescue that included $20 billion from the Treasury Department's Troubled Asset Relief Program, and protection on $306 billion of troubled debt. Citigroup previously got a $25 billion TARP infusion.

Analysts are hurriedly boosting their forecasts for expected losses at New York-based Citigroup after reports surfaced on Sunday that the third-largest U.S. bank could post a fourth-quarter operating loss in excess of $10 billion. The bank is scheduled to report results on January 22.

Results "are likely to continue to be pressured by very sharp increase in credit costs, predominantly in the U.S., further large writedowns, high cost of additional preferred capital, (the) high cost of expensing insurance provided by thegovernment, and very weak performance in its investment banking related businesses," JPMorgan analyst Vivek Juneja wrote on Tuesday.

The analyst now expects a fourth-quarter loss of $1.09 per share, reflecting a gain of 74 cents per share from the sale of its German retail banking business, and a 2009 loss of 30 cents per share. He previously expected profits of 45 cents for the quarter and $2.10 for the year.

(Reporting by Jonathan Stempel; editing by John Wallace)

Publié le 13 janvier 2009 Copyright © 2009 Reuters