Citi Struggles Even as Other Banks Show Strong Profits

Citi Struggles Even as Other Banks Show Strong Profits
By ERIC DASH
Copyright by The New York Times
Published: October 15, 2009
http://www.nytimes.com/2009/10/16/business/16citi.html?ref=global-home


Citigroup’s third-quarter results offered a glimpse Thursday into the bank’s struggles to turn itself around, as spiraling consumer losses overwhelmed its strong trading results.

The bank’s headline number — net income of $101 million — came before it accounted for $288 million in preferred dividends and a debt exchange that gives Washington 34 percent of earnings.

After including the items, the loss to stockholders was 27 cents a share, or $3.2 billion, compared with a loss of 61 cents a share, or $2.9 billion, in the third quarter a year ago. Revenue increased to $20.39 billion from $16.25 billion.

Analysts surveyed by Thomson Reuters had expected a 38 cent loss on revenue of $20 billion.

The results add to the mounting pressure on Citigroup’s chief executive, Vikram S. Pandit, to turn around the troubled bank, which is one-third owned by taxpayers. Mr. Pandit has been trying to shrink the bank’s balance sheet in the worst financial crisis since the Great Depression.

All the while, he is trying to find a way to repay part the $45 billion in federal aid and get out from under the government’s thumb. That has made it crucial for the bank to show investors it had a gain in the quarter, no matter how it eked it out — hence, stressing the $101 million in income from continuing operations.

Citigroup’s shares were down 4.8 percent in midmorning trading.

The results came on the coattails of its trading operations, which cranked out good results from its bond and currency businesses. Still, its credit card and mortgage units are hemorrhaging money, contributing to about $9.4 billion in consumer losses. And the bank added another $802 million to its reserves, about half as much as JPMorgan Chase set aside on Wednesday, as it braces for several more quarters of losses. Both banks now have loss reserves of over 5 percent of their loan portfolios.

“This was an important quarter for us; sustainable profitability remains our primary goal in the near term. ” Mr. Pandit said in a statement. “While consumer credit trends are improving in international markets, the U.S. consumer credit environment remains challenging.”

It was another messy quarter for the company. Beyond widely diverging figures between its reported net loss and operating profit stemming from accounting treatment, the bank suffered a $1.7 billion hit to its revenue from another adjustment, due to narrowing credit spreads.

It also booked a $1.4 billion gain associated with an exchange offer with the government that reduced income to ordinary shareholders, and a $1.97 billion gain on the value of some of its troubled mortgage-related investments, known as collateralized debt obligations.

Citigroup broke its results into two segments. Citicorp, its core consumer and corporate banking operation, had a $2.2 billion profit in the third quarter. Citi Holdings, which contains the money-losing businesses and toxic assets the bank plans to sell, showed a $1.9 billion quarterly loss. It was weighed down by the heavy losses tied to private-label credit cards, mortgages and consumer loans.

Revenue from its investment-banking business hit a plateau after surging in the previous quarter, as the markets calmed and liquidity conditions improved, reducing trading opportunities in complex credit products and securities.

Citi said that revenue from equity markets fell to $446 million from $1.1 billion three months earlier, and that revenue from fixed-income markets were also lower.

John C. Gerspach, Citigroup’s chief financial officer, said the bank was adequately reserved and presented a mixed picture of conditions in the United States. Mortgages losses, for example, began to slow in the quarter, in part because of the government’s mortgage modification program, while more credit card borrowers fell behind on their loans.

But Mr. Gerspach pointed to marked improvement overseas, causing losses to moderate. “We have seen improvements particularly in Asia, where it seems like it has already turned,” he said on a conference call. Latin America, he added, also seems to be on the rebound.

Citigroup’s numbers follow the strong showings by JPMorgan Chase, whose higher-than-expected $3.6 billion profit on Wednesday ignited the stock market, and Goldman Sachs, which reported a profit of $3.19 billion earlier Thursday. Although consumer loan losses throughout the industry remain high, there are signs that they might start moderating.

Citigroup’s position, however, is somewhat unusual. On the one hand, Citigroup has less exposure to worsening commercial real estate loans than many of its rivals. That puts it in a positions to rebound more quickly as the economy recovers.

On the other hand, its existing problems run much deeper. And its sprawling consumer lending operations make it vulnerable to a global downturn.

Mr. Pandit now seems to recognize that the clock is ticking, even if he got off to a slow start. In the quarter, he raced to sell businesses, including the bank’s Norwegian consumer finance arm, its Portuguese credit card division and a Japanese brokerage unit. He has lightened the bank’s balance sheet and eliminated thousands of jobs, and the bank said it is outperforming regulators’ revenue projections on last spring’s stress test. But is spite of the progress during the quarter, Citigroup’s executives acknowledged they were constrained.

“We are not doing heavy investment in Citicorp businesses,” Mr. Gerspach said. “We are still de-risking the business.”

Citigroup also remains heavily constrained by its awkward relations with the government. A week ago, the bank sold a lucrative energy trading unit to Occidental Petroleum to avoid a public showdown with the federal compensation specialist over a nine-figure bonus. Regulators, who are insuring some $306 billion of toxic assets, have ordered Citigroup’s senior executives to undergo a management review.

What is more, the bank seems to be months away, if not longer, from being healthy enough to start repaying the $45 billion it received in federal assistance. To do so, it must not only prove to regulators that it is healthy enough to raise capital, but it also must navigate a thicket of tax issues. “Repaying TARP as soon as possible is clearly one of our stated goals,” Mr. Gerspach added, declining to provide a timetable.