Citigroup (NYSE:C) shareholders breathed an enormous sigh of relief on Monday, welcoming a second government bailout that didn’t significantly dilute them. They may not be out of the woods yet, though: In a research note published yesterday, UBS (NYSE:UBS) analysts, led by Glenn Schorr, praised the government’s latest efforts, but said they expect the bank will need to do “a sizable common [equity] issuance by early 2010” to bolster its balance sheet.

While the government’s $20 billion preferred-share investment and its loss guarantee provide approximately $40 billion in extra capital, they do little to improve Citi’s tangible common equity, against which any losses are charged first (tangible common equity is a measure of net worth that strips out intangible assets, including goodwill).

$35.5 billion in tangible net worth vs. a $29 billion ceiling on first losses ...
... doesn’t leave Citi with a lot of breathing room. Furthermore, while the government will cover any losses exceeding $29 billion on $306 billion of the bank’s assets, these don’t include the credit card loan portfolio, for example.

As the following table shows, although Citigroup’s new Tier 1 Capital ratio is now gleaming, its common equity-to-total assets ratio remains significantly lower than those of its two closest peers, JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC).

Company

Tier 1 Capital Ratio

(Sept. 30, 2008)

Average Common Equity-to-Average Assets Ratio

(Sept. 30, 2008)

Citigroup

14.8%

(Adjusted for the government’s latest preferred-share investment/loss guarantee)

5.1%

UBS

10.8%

2.1%

JPMorgan Chase (NYSE:JPM)

8.9%

6.9%

Wells Fargo (NYSE:WFC)

8.6%

8.1%

US Bancorp (NYSE:USB)

8.5%

8.4%

SunTrust Banks (NYSE:STI)

8.2%

9.9%

Bank of America (NYSE:BAC)

7.6%

8%

Source: Capital IQ, a division of Standard & Poor’s.

Perhaps UBS analysts would have been more reassured if the U.S. authorities had taken a lesson from their employer. In October, the Swiss government transferred $60 billion in dodgy assets off UBS’s books into a separate investment entity managed by the Swiss central bank -- something the U.S. Treasury stopped just shy of doing. Maybe that’ll be the next step in this rapidly expanding bailout.

More Foolishness:

Lower equity prices will mean higher future returns for those who have the courage to invest in outstanding businesses now. The team at Motley Fool Inside Value can help you find those businesses. To find out their two latest stock picks, sign up for a 30-day free trial now.

Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. US Bancorp, JPMorgan Chase, and Bank of America are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.