Citigroup Inc.’s (C) management indicated that it is comfortable with its valuation for an asset that is expected to be written down by an accounting expert.

Citigroup has a roughly $38 billion deferred tax asset, which essentially represents expected cash flow from future tax benefits. However, accounting expert Robert Willens expects the bank to write the asset down by about $10 billion (equivalent to about 7% of the bank’s net worth) in the fourth quarter of 2009.

Citigroup Vice Chairman Ned Kelly said the bank stands by its deferred tax asset valuation. The company expects to realize about $16 billion of the deferred tax asset by around 2016, and the remainder in an even longer time frame.

Citigroup, once the largest U.S. banks by assets, fell behind last year after a series of acquisitions by rivals. Citi has been among the banks hardest hit by the credit crisis and recession. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.

The U.S. government has injected $45 billion in bailout funds into the bank, $25 billion of which was converted to a 34% equity ownership stake and guarantees to protect against losses on more than $300 billion in risky assets. Top-level management at the company is formulating plans to downsize the government’s stake in the company through a multibillion-dollar stock offering and return the bailout funds to the government as soon as possible.

Citigroup’s third quarter 2009 loss from continuing operations of 23 cents per share was in line with the Zacks Consensus Estimate. This compares favorably with a net loss of 72 cents in the prior-year quarter. Results for the quarter included $8 billion in net credit losses and an $802 million in net loan loss reserve build.

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake. We expect Citigroup to incur higher credit losses in the upcoming quarters as its restructuring process continues. As such, we are maintaining our Neutral recommendation on Citigroup.

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