3rd UPDATE: Citigroup's Results Worsen In 3Q Due To Credit
Thursday October 16th, 2008 / 18h38
(Adds comments from conference call, starting in the fifth paragraph.) By Matthias Rieker Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Citigroup Inc.'s (C) third-quarter results showed a shift of the banking crisis from Wall Street to Main Street as losses related to lending now outweigh market-related write-downs. In addition, Citi's strength in global banking didn't insulate the company any longer from the credit crisis. Income from almost all parts of the world declined in most of Citi's lines of business. The company, which has $2.1 trillion in assets, reported its fourth consecutive quarterly loss Thursday. "There were three factors that drove this quarter's results - higher consumer credit costs, continued losses related to the disruption in the fixed-income markets, and a general economic slowdown," Chief Financial Officer Gary Crittenden said during a conference call with investors. Crittenden said rising unemployment indicated that losses in mortgage lending and in the credit card business will continue to rise. Citi, which last week backed down from its battle against Wells Fargo & Co. (WFC) for Wachovia Corp. (WB), reported a net loss of $2.81 billion, or 60 cents a share. In the year-earlier period, it reported net income of $2.21 billion, or 44 cents a share. Revenue fell 23% to $16.7 billion. The results show the bank, which had already racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown over the past year, is still roiling from its mortgage-related securities and the credit crisis. Citi reported $4.4 billion in net pretax write-downs. Crittenden said Citi's holdings of collateralized debt obligations, complex securities that have suffered steep market losses, "are virtually entirely written off." When asked about marks on other assets, Crittenden said, "there is lots of benchmark information out here, and we look at those benchmarks and we ensure that we conform with the other securities in the market." Citi cut 11,000 jobs in the latest quarter, some 3% of staff, putting this year's total at 23,000. While the write-downs tied to the capital-market crisis narrowed for the second consecutive quarter, credit costs continued to jump. Expenses related to loan losses and the loan-loss provision nearly doubled from the second quarter to $9.1 billion. Crittenden had expected for some time that the size of Citi's markdowns tied to illiquid assets would begin to decline. But as the global economy weakens, credit costs, or losses and provisions for losses from lending, rise in many parts of the world. "That creates an interesting dynamic," Crittenden said during an interview with Dow Jones Newswires. Mark-to-market losses hit capital "substantially," but credit losses, as painful as they are, have less impact on a bank's capital base, he said. "The credit losses have typically not the same risk associated with them, because they come against income. It's a question of earnings rather than a question of the capital." Crittenden wouldn't predict when the company would return to profitability. But he said the shift from market-related write-downs to credit reduces the volatility of quarterly results, because bankers have models to predict credit losses while write-downs hinge on unpredictable activity in capital markets. Overall, Citi's credit provision, the amount a bank adds to the reserve it set aside for loan losses, doubled from a year earlier to $8.9 billion, and its total reserve increased 49% to $24 billion. That level, Crittenden said, "relative to competitors looks pretty good. We are in reasonable shape from a reserve standpoint." Credit problems have been mainly a U.S. issue for Citi, but in the third quarter credit quality has deteriorated in Mexico, Brazil, and India. Korea, on the other hand, is holding up much better. "You have very different performance from country to country," Crittenden said, depending on how strong the country's ties are to the faltering U.S. economy and on how overheated the respective domestic economy was. U.S. deposits rose 6% quarter over quarter to $270 billion. The speed of the $17 billion deposit inflow from the second quarter increased in the last weeks of the quarter, Crittenden said, particularly in deposits from businesses "as there was broad concern and probably a flight to quality." Consumer deposits in the U.S. were virtually flat from the second quarter, but that result suggests Citi gained because otherwise those deposits would have been down since Citi sold branches in Texas and Nevada. Chief Executive Vikram Pandit said in a press release, "While our third-quarter results reflect both a difficult environment as well as continued write-downs on our legacy assets, we are making excellent progress on the parts of our business we control, including expense reduction, headcount, and balance sheet and capital management." In addition to continued cost cuts, Citi continued to shrink, ridding its balance sheet of assets that don't provide attractive returns. Citi's assets shrunk more than 13% from a year earlier, and the company is now smaller than JPMorgan Chase & Co. (JPM), which on Wednesday reported total assets of $2.3 trillion following the acquisition of the banking operations of Washington Mutual Inc. Citi's shares in late morning trading were down 8% to $14.93. Citi's shares have fallen roughly in half so far this year. Citi's largest business, consumer banking, swung to a $1.1 billion loss amid the credit losses, though revenue edged up 1.7%. Higher revenue in North America was offset in part by declines in Latin America and Asia. The global credit card business swung to a $902 million loss, while revenue fell 40%. A year earlier, the company had benefitted from gains derived from its stake in Brazilian card company Redecard SA (RDCD3.BR), which it reduced in March. On credit cards, Crittenden said, "it is possible that we may see loss rates exceed their historical peaks." The institutional clients group, including Citi's securities and investment-banking operations, posted a 48% plunge in revenue as it swung to a $2.02 billion loss amid the write-downs. The global wealth-management business, including the Smith Barney retail-brokerage unit as well as Citi's private bank, saw profits fall 26% as revenue slid 10%. The results reflected a decline in capital markets and investment revenue, partially offset by higher banking and lending revenue. -By Matthias Rieker, Dow Jones Newswires; 201-938-5936; matthias.rieker@dowjones.com (Donna Kardos contributed to this story.) Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=3N1Yh%2B763c8JAxskzsObjw%3D%3D. You can use this link on the day this article is published and the following day.
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