AP
Citigroup Suffers 57 Pct. Profit Drop
Monday October 15, 6:14 pm ET
By Madlen Read, AP Business Writer
Citigroup Suffers 57 Pct. Profit Drop; Current Quarter Looks Far From Rosy and Stock Slides


NEW YORK (AP) -- Citigroup Inc.'s report of a 57 percent drop in third-quarter profit didn't surprise anyone. What did sound some alarms was the biggest U.S. bank's somber take on current conditions -- suggesting that a hoped-for industry rebound may not come so easily.

Investors responded by sending Citigroup's stock down more than 3 percent, and analysts made it clear that shareholders' displeasure with CEO and Chairman Charles Prince is escalating.

Citigroup took mortgage-backed security losses of $1.56 billion in the third quarter, more than the bank estimated two weeks ago, because home loan delinquencies accelerated in September, CFO Gary Crittenden said. And with consumer credit continuing to deteriorate, the bank's $2.24 billion boost in loan-loss provisions was also higher than previously estimated.

Though Prince said Oct. 1 he foresaw a more "normal" profit environment in the fourth quarter, Citigroup's comments Monday were not quite as upbeat. Crittenden said in a conference call with analysts that parts of its fixed-income holdings have weakened: "We are not optimistic they will regain a foothold in the market," he said.

In the third quarter, worries about bad loans caused the credit markets to freeze up. The Federal Reserve lowered interest rates and helped loosen up the markets, but they're nowhere near as liquid as they were earlier this year. Citigroup, JPMorgan Chase & Co. and Bank of America Corp. confirmed Monday they are joining to buy assets that lost value in the market for mortgage-backed securities.

Citigroup's net income fell to $2.38 billion, or 47 cents per share, in the July to September period, from $5.51 billion, or $1.10 a share, in the same period last year. Revenue rose 6 percent to $22.66 billion from $21.42 billion a year earlier.

The results included a $729 million pretax gain from the sale of shares of Redecard SA, a company that signs up merchants in Brazil for MasterCard Inc.

Excluding the Redecard gain and acquisitions, Citigroup's revenue fell 3 percent to approximately $20.8 billion. That's below the revenue forecast by Thomson Financial analysts, who predicted earnings of 44 cents a share and revenue of $21.76 billion. Analyst forecasts don't typically include one-time gains.

Citigroup's shares fell $1.63, or 3.4 percent, to close Monday at $46.24.

That's down more than 10 percent since the start of July, and more than 16 percent year-to-date. Officials said there would be no stock buybacks until the ratio of capital to risk-weighted assets improves, which probably wouldn't be until early 2008.

"The company continues to face pressure to improve financial performance and despite recent changes to its structure, management will have to deliver better results over the next few quarters to restore investor confidence," Goldman Sachs analysts wrote in a note.

Last week, the bank combined its investment banking and alternative investments units into one business led by former Morgan Stanley executive Vikram Pandit, who has run Citigroup's alternative investments unit for several months. Tom Maheras, co-CEO of the investment banking unit, and Randy Barker, a co-head of fixed-income trading, left.

Prince called the third quarter "disappointing."

"We're working very hard on the areas that need improvement," Prince said during the analyst call.

Disappointment among shareholders over Prince's leadership, which has been brewing for a few years now, appears to be growing.

"The bottom line here is almost all the investors that I talk with feel like there needs to be more significant changes in terms of management," Deutsche Bank analyst Mike Mayo said during the call, after noting that investment banking was not Citigroup's only weak point last quarter.

Mayo pointed to risk management issues, and the likelihood of expenses outpacing revenues this year. Citigroup's third-quarter operating expenses rose 22 percent.

Prince responded that several of Citigroup's businesses have been improving. Citigroup's global wealth management revenue rose 41 percent in the third quarter, fueled by a 42 percent increase in international revenue and a 24 percent jump to record revenue at Smith Barney. Global consumer revenue rose 14 percent after a 35 percent rise in international consumer revenue.

"A fair-minded person would say the strategic plan is working," Prince said.

As in previous quarters, the bank's international businesses -- with the exception of its lagging Japan consumer finance unit -- performed better than stateside operations. U.S. consumer revenue was flat, after increases in retail operations and consumer lending offset decreases in U.S. cards and commercial businesses.

Markets and banking revenue fell 24 percent, despite a 7 percent international revenue gain. In addition to the $1.56 billion in mortgage-related losses, the segment suffered a $1.35 billion write-down on highly leveraged debt tied to corporate deals and $636 million in fixed income credit trading losses.

Credit costs rose $2.98 billion. Revenue in alternative investments fell 63 percent.