Citigroup Inc. (C) — still reeling from the subprime fallout — was the target of another downgrade. Goldman Sachs (GS) analyst William Tanona said the bank may suffer $8.9 billion of second-quarter writedowns and be forced to cut its dividend again.

Tanona downgraded US banks to “neutral” from “attractive” and added Citigroup to Goldman’s “Americas conviction sell” list, Reuters reported.

“We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales,” Tanona wrote.

To little surprise, Citigroup’s shares sunk in morning trading, falling below their previous 52-week low of $17.99.

Citigroup has shed more than $46 billion in write-downs and credit losses since the subprime crisis began in mid-2007. Those losses have forced the struggling bank to raise $42 billion in emergency capital, primarily through cash infusions from foreign investors and sovereign wealth funds.

For the second quarter this year, Tanona expects the bank to post a loss of 75 cents per share, a full dollar down from his previous forecast of a 25-cent per share profit.

In January, Citigroup slashed its dividend by 41% to 32 cents, but Tanona said another cut may be necessary to preserve an annual $3.5 billion in capital in the face of dry earnings.

“Given the firm’s current level of earnings power, we do not believe the dividend is safe,” he wrote.

Merrill in the Crosshairs

Meanwhile, Merrill Lynch & Co. Inc. (MER), the world’s largest brokerage firm, may have to shed $4.2 billion in write-downs, Tanona wrote.

He expects Merrill to post a second-quarter loss of $2 a share, down significantly from his earlier forecast of a 25-cent-per-share profit. For the year, his previous forecast of an 8-cent-per-share profit is now a loss of $3.55 per share.

The latter is a strong signal that the downstream economic outlook in the second half isn’t as promising as forecast.

“The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,” Tanoma wrote.

Despite the waist-deep troubles many financials are in, Money Morning Investment Director Keith Fitz-Gerald believes that some still represent a solid long-term investment.

And his favorite is Citigroup.

“Citi is trading for a pittance,” Fitz-Gerald said. “Value investors will recognize this as important because history shows that the lower P/E ratios are when you make an investment, the better your overall returns tend to be. Generally, large globally diversified companies are considered bargains at a P/E of 12, which makes Citi a screaming deal at 7 or 8.”

Source: Goldman’s Crystal Ball: Citigroup, Merrill are in Serious 2Q Trouble