Citi results weighed down by failed loans

By IEVA M. AUGSTUMS

posted: 41 DAYS 3 HOURS AGO

Text SizeAAA

CHARLOTTE, N.C. -Citigroup provided a sobering reminder Thursday that the economy is still struggling, reporting that its third-quarter results were weighed down by billions of dollars in failed loans.

The bank reported a $101 million profit before accounting for $288 million in preferred stock dividends and the debt exchange offer that gave the government a 34 percent stake in the bank. Including those items, the New York-based bank reported a $3.24 billion loss.

Citigroup, one of the hardest hit during the credit crisis and recession, said loan losses during the quarter came to $8 billion, down $386 million from nearly $8.4 billion in the second quarter, but a sign that many consumers continue to be overwhelmed.

Citigroup's results are a measure not only of its health after it lost nearly $19 billion in 2008 and needed a $45 billion government bailout, but also the economy's, since the bank caters to consumers.

Banks including Citigroup had warned when second-quarter earnings were released that loan losses would continue into next year. Investors nonetheless reacted negatively to the bank's report of continuing heavy loan losses, and sent Citigroup shares down 30 cents, or 6 percent, to $4.70 in late trading. Other financial company stocks fell sharply in what was overall a modestly lower stock market.

"The bank is not making money, they are losing money in credit cards and mortgages, and it's dragging down the entire bank," said Bart Narter, a senior vice president at consulting firm Celent.

John Gerspach, Citigroup's chief financial officer, said during a call with media that the outlook for loan losses in the company's North American operations is "somewhat mixed." Citigroup said it added $800 million to its loan loss reserves during the third quarter, down $3.1 billion from the addition it made during the second quarter. In a conference call with analysts, Gerspach said the company had $28.4 billion in its loan loss reserves for consumer loans, including mortgages and credit cards.

Nancy Atkinson, senior analyst at Boston-based research firm Aite Group, said because of credit trends and the struggling consumer, Citi "still has a number of quarters that are going to be challenging."

"They made very bad bets on mortgages and consumer lending. They were clearly a leader in the consumer card space, and as a result are suffering now," Atkinson said.

Citigroup, like other national banks, has seen more customers stop repaying loans as the economy falters and unemployment rises. Credit card defaults and mortgage losses are likely to continue to climb.

CEO Vikram Pandit told analysts on a conference call Citi's credit costs "remain elevated and clearly U.S. consumer credit remains the No. 1 issue affecting our near-term results."

"We are seeing further confirmation of signs of improvement in our international markets, but challenges remain in the U.S," he said.

On the same call, Gerspach said the bank is seeing signs of improvement in Asia and Latin America, where economic rebounds are believed to be ahead of the U.S.

"The key to recovery will be driven by an improvement in credit in the key North American businesses," he said.

Losses on credit cards typically mirror unemployment, which in the U.S. rose to 9.8 percent in September. Economists predict the jobless rate will pass 10 percent in the coming months.

The debt exchange offer completed during the quarter gave Citigroup a better mix of capital to withstand additional loan losses and further weakening in the economy. It resulted in the government owning a 34 percent stake in Citigroup. The company took an accounting charge of $3.06 billion as a result of the exchange, contributing to the majority of its third-quarter loss.

Citigroup has received $45 billion in loans from the U.S. government, part of which was converted to that ownership stake. It has also received guarantees to protect against losses on more than $300 billion in risky assets.

As part of its efforts to rebuild, Citigroup in January split its operations into two entities: Citicorp and Citi Holdings. The company also continues to sell off assets.

Citicorp, its core consumer and corporate banking operation, had $2.3 billion profit in the third quarter.

Citi Holdings, which contains the money-losing businesses and toxic assets the bank plans to sell following the credit crisis, 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.

JPMorgan Chase & Co., which reported quarterly results Wednesday, also struggled with rising loan losses, particularly in its home and credit card loan portfolios. However, its strong investment banking division more than offset the troublesome loans, helping JPMorgan earn $3.59 billion during the quarter.

2009-10-15 15:50:35