Credit woes sink Citigroup to another loss

October 16, 2008 12:50:14 PM PDT
Citigroup Inc. suffered its fourth straight quarterly loss and said it has cut 11,000 jobs since June, drubbed again by the relentless downturn in housing and turmoil in the financial markets. The New York-based bank said Thursday it lost $2.8 billion, or 60 cents per share, in the third quarter, compared with a profit of $2.2 billion, or 44 cents per share, a year ago. The deficit for the July-to-September period brings Citi's total losses over the past 12 months to $20.2 billion.

The shortfall for the quarter was narrower than anticipated. Analysts polled by Thomson Reuters expected a loss of 70 cents per share.

But the results were hardly reassuring. Citi wrote down $4.4 billion in investments, plus another $612 million from a settlement related to auction-rate securities; recorded $4.9 billion in credit losses; and took a $3.9 billion charge to boost reserves. The bank has written down the value of its investments tied to souring mortgages and other bad debt by some $51 billion since this time last year.

Shares fell $1.15, or 7 percent, to $15.08 in midday trading.

The frailty of the financial system has led the government to pledge $25 billion to each of the big four U.S. banks - Citigroup, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co.

Of these four institutions, Citi appears to be on the shakiest footing. It is the only one to have posted quarterly losses over the past year, and it is shrinking while its peers are growing.

With $2.05 trillion in total assets now, Citigroup has officially forfeited the title of largest bank by assets, falling behind JPMorgan Chase's $2.25 trillion in total assets. Bank of America currently has $1.91 trillion in assets, and will have more when it completes its buyout of Merrill Lynch, which on Thursday reported a $5.2 billion loss. Wells Fargo has assets of $622 billion ahead of its acquisition of Wachovia Corp.

Citi not only eliminated 11,000 jobs during the third quarter - bringing its total headcount reduction so far this year to 23,000 - but it also shed $50 billion in assets. CEO Vikram Pandit announced in May that Citi intends to rid itself of nearly $500 billion in assets to get out of businesses such as risky mortgages; the bank said that over the past year, it has lopped off $308 billion in total assets.

Meanwhile, the bank has not made any major acquisitions. While JPMorgan Chase snapped up Bear Stearns Cos. and Washington Mutual Inc., and while Bank of America nabbed Merrill Lynch, Citigroup lost the bid for Wachovia and its massive deposit base to Wells Fargo.

"With Wachovia out of the picture, there is no doubt that Citigroup will pursue another acquisition," said Isabel Schauerte, an analyst with the research and consulting firm Celent, in a note. "However, if anything, these results suggest that the bank should focus on repairing its troubled balance sheet while waiting for another buying opportunity that has the scale Citi is hungry for."

On the positive side, Citigroup's write-downs were smaller than in the second quarter. Expenses were down $1.2 billion compared with the previous quarter and the bank maintained a Tier 1 capital ratio of 8.2 percent. A Tier 1 capital ratio essentially measures equity against risky assets. Citi's ratio is considered strong by historical measures, and is expected to tick higher when the government takes its stake.

But as JPMorgan's and Wells Fargo's third-quarter reports illustrated on Wednesday, the credit environment, particularly when it comes to consumers, is worsening.

During a conference call with investors, Chief Financial Officer Gary Crittenden said that if the unemployment rate keeps rising above 6 percent and the economy keeps slowing, there will be negative consequences - "that card losses could exceed their historical peaks, and that mortgage losses could continue to grow."

In North America, more credit card holders became delinquent and more had to be written off, Citi said. The credit loss rate jumped to 7.3 percent from 6.46 percent in the second quarter and from 4.37 percent a year ago. Credit card loss rates worsened in Latin America and Asia, too.

Citigroup also said defaults in residential real estate loans, notably first mortgages, increased.

As the bank tightened its lending standards, average loans to consumers grew by a mere 1 percent year from a year earlier, while corporate loans were down 15 percent.

"We are very focused on client profitability," Crittenden said.