Citi records first profit in six quarters/Citi trade profitable but now tough to execute

Citi records first profit in six quarters
By Adrian Cox, Investment Banking Correspondent
Copyright The Financial Times Limited 2009
Published: April 17 2009 12:37 | Last updated: April 17 2009 14:46
http://www.ft.com/cms/s/0/bfb1f8da-2b41-11de-b806-00144feabdc0.html


Citigroup reported its first profit in six quarters, joining rivals in benefiting from a rise in trading activity.

The US bank said on Friday it made a net profit of $1.6bn compared with a net loss of $5.1bn a year earlier, marking its highest earnings since the second quarter of 2007. Revenue doubled to $25bn amid a boom in trading fixed income and equities. Writedowns of toxic assets were a fraction of last year’s in part because of a change in fair-value accounting rules.

Earnings from the securities division were offset by steep declines from credit cards and a deficit in consumer banking because of loan losses as a global recession deepens.

The results beat market expectations and Citi shares were up 2 per cent at $4.09 in early trading.

“While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise,” Vikram Pandit, chief executive, said in a statement. “We will continue to reduce our legacy risk, aggressively manage expenses and improve efficiency.”

Citigroup, which needed billions of dollars in state aid after huge losses on mortgage-backed securities, in February agreed to give a 36 per cent stake to the government as part of its partial nationalisation.

Despite its return to net profitability, the bank recorded a loss per share of 18 cents, reflecting a reset in the price of convertible preferred stock in January. This compared with a loss of $1.08 a share in the first quarter of last year. The bank’s Tier 1 capital ratio, a key measure of financial strength, was about 11.8 per cent, up from 7.7 per cent last year.

The future of its management is likely to depend on whether it can avoid further state assistance. Mr Pandit, installed after Charles Prince was ousted early in the crisis, consolidated his hold on the company by reshuffling the senior ranks last week.

The bank, until recently the world’s biggest financial services company, has slashed headcount aggressively by 65,000 from the peak to 309,000.

Citigroup is the latest investment bank to beat expectations for first-quarter profit, as analysts have remained sceptical about a steady stream of bullish statements on trading conditions by chief executives on both sides of the Atlantic.

JPMorgan Chase on Thursday reported strong first-quarter results driven by record investment banking profits. Goldman Sachs reported earnings of $1.8bn earlier this week. While both received government assistance at the height of the financial crisis late last year, they took far less than Citigroup and have signalled their desire to repay it as soon as possible.



Citi trade profitable but now tough to execute
By Elinor Comlay and Dan Wilchins
Copyright by Reuters, 2009
Fri Apr 17, 2009 7:54pm EDT
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE53G5Y420090417


NEW YORK (Reuters) - A popular trade involving Citigroup shares could yield fat profits after the bank said on Friday it is not changing terms of a preferred share exchange, but new investors could struggle to get a piece of the action.

The trade involves buying Citi preferred stock and simultaneously selling borrowed shares of common stock (C.N), known as short-selling.

The preferred shares can be converted into common stock in a few weeks, meaning they can effectively be used to buy Citigroup shares at a much lower price than the level at which they can be sold now, potentially yielding a 200 percent profit.

Getting into the trade now is difficult, because borrowing Citigroup shares to sell them short is so expensive.

The cost of borrowing Citi shares until mid-June, as implied by the options market, went from roughly 5 percent in early March to about 25 percent now because of the increase in demand, analysts said.

Citigroup said in February it would begin exchanging up to $52.5 billon of preferred shares for common shares in the beginning of April. As early April turned into mid-April, many investors feared the terms of the deal would be changed, or the transaction would be delayed for a long period of time, or even canceled altogether.

But Chief Financial Officer Ned Kelly said on Friday the exchange is going to go through on previously described terms, after the government finishes its stress test of the bank.

When asked on a conference call if there was any chance of the offer being canceled, Kelly said, "I think there's a 5 percent chance the sun doesn't come up but the short answer is no."

To many experts, that signals the trade is still alive.

Analysts Venu Krishna and Maneesh Deshpande at Barclays Capital on Friday said value investors could simply buy Citi convertible preferred stock series T, which traded for about $34.25 on Friday. When the exchange offer goes through, a $34.25 preferred share will convert into roughly 13.08 Citi shares now worth about $47.73. In other words, $34.25 of preferreds can buy $47.73 worth of common stock.

Under the exchange offer terms announced in February, preferreds will buy Citigroup shares at $3.25 each. Some analysts and investors had speculated earlier this week that Citigroup might lift that price closer to $4, a step that would allow Citigroup to issue fewer new shares and dilute existing shareholders less.

"We are more comfortable that the deal will go through without any changes after today's announcement," said Krishna.

MOVING TO DERIVATIVES

Here's how the trade works: On Friday, Citi's convertible preferred shares series T (C_pi.N) traded at around $34.25, with a face value of $50. Under the terms of Citi's exchange offering, the $50 face value is discounted by 15 percent, and can then buy shares at $3.25 apiece, which translates to about 13.08 shares. Those shares now trade at $3.65 a piece, so 13.08 shares are worth about $47.73.

The difference between the price of Citi shares and the exchange price is now about 10 pct, while a week ago it was about 5 percent. Continued...