WASHINGTON - Ailing US banking giant Citigroup led by Indian American CEO Vikram Pandit plans to raise $5.5 billion by converting more preferred stock to common shares as prescribed by government stress tests.

‘The government’s stress test was a rigorous process that assessed our capital and confirms our view that Citi’s plans and actions will give it the financial strength to weather an adverse stress scenario,’ Pandit said in a statement Thursday.

‘The results also reflect 15 months of continuous work, tough decisions and steady execution towards a strong and stable Citi with a clear strategy for the future,’ he said.

Citi will expand the exchange offers previously announced in late February by increasing the maximum amount of preferred securities and trust preferred securities that it will accept in exchange for common stock from $27.5 billion to $33 billion.

The move will further increase Tier 1 common without any additional US government investment or conversion of US government securities into common shares, it said.

The transaction could increase the banking institution’s Tier 1 capital to as much as $86.2 billion from $22.1 billion at the end of the first quarter. Citi’s tangible common equity would rise to as much as $91.3 billion from $30.9 billion.

The news came in conjunction with the results of the Supervisory Capital Assessment Programme (SCAP), in which the US government said that Citi would need an additional $5.5 billion as a ‘buffer’ in case of a ‘more adverse scenario.’

Citi had said last month that it had delayed the exchange offer until after the stress tests were completed.

The conversion price of $3.25, the exchange factors and the priority of trust preferred securities accepted in the exchange offers will remain unchanged from the transaction terms as previously announced, it said.

Based on the maximum eligible conversion, the US government would own approximately 34 percent of Citi’s outstanding common stock and existing shareholders would own approximately 24 percent of the outstanding common shares.

After being pressured by regulators, Citi split the company into a good bank-bad bank structure under Citicorp, the good bank, and Citi Holdings, the bad bank.

Citi also noted that since early 2008 it has reduced expenses by 25 percent and headcount by almost 20 percent from the fourth quarter of 2007. The company has also shaved 23 percent off its balance sheet from the third quarter of 2007.

Citi has also completed 23 divestitures, most notably with its Smith Barney joint venture with Morgan Stanley and its intended sale of Nikko Cordial to Japan’s Sumitomo Mitsui Financial.