Citigroup losses masked by Smith Barney gain

By Joseph A. Giannone

NEW YORK (Reuters) - Citigroup Inc on Friday said loan losses surged again in the second quarter, yet gains from selling most of its Smith Barney brokerage helped the company report the highest profit among big U.S. banks.

Citigroup, twice deemed too big to fail by the U.S. government during the past year, recorded an $11.1 billion pretax gain from selling Smith Barney into a joint venture with Morgan Stanley's brokerage unit. Citi received a 49 percent stake in the venture and cash.

The deal boosted Citi's net income to $4.28 billion, or 49 cents a share, compared with a year-earlier loss of $2.50 billion, or 55 cents. That surpassed the $2.7 billion profits reported this week by both Goldman Sachs Group Inc and JPMorgan Chase & Co.

Yet strip out the gain and Citigroup had an operating loss. Analysts pegged the loss at 62 cents a share, compared with the average forecast for a 31 cent per share loss.

Shares of Citi, little changed late in the session after rising 5 percent earlier, illustrated how investors are not quite sure how to grade the bank's ongoing efforts to rebound from two years of woe.

"It's a mixed quarter. You weren't looking for a Goldman Sachs or JPMorgan-type of quarter, but we expected Citi to be a lot better than it was," said Michael Mullaney, who helps manage $9 billion for Fiduciary Trust Co in Boston.

Analysts and investors said the credit costs at Citi, which has banking operations in more than 100 countries and a pile of "toxic" assets, were a bigger drag than they had expected.

"They seem to be suffering more than the others as far as losses go from credit cards, mortgages and consumer loans, in general," Mullaney said.

Citigroup stock is down 94 percent since peaking in May 2007 and has fallen by half this year, though it has tripled in price since financial services stocks began rallying in March. Shares were off 3 cents at $3.00 in New York Stock Exchange trade.

LESS BAD

The New York bank, once one of the most powerful in the world, has been among the biggest losers in the three-year financial crisis. The U.S. government has twice stepped in to bail out a bank slammed by credit losses, injecting $45 billion through preferred stock after Citi exhausted private sources.

Under pressure to revive the fallen giant, Chief Executive Vikram Pandit in January split the company in two: Citicorp, the company's global commercial and investment banking business; and Citi Holdings, an assortment of unwanted units and assets to be sold off.

In presenting second quarter results to investors, Citigroup officials emphasized that the pace of the increase in credit losses has slowed.

Chief Financial Officer John Gerspach told Reuters he sees improvement in Citi's consumer loan portfolio and expects the bank to fare better than rivals as commercial real estate -- where it has less exposure -- starts to suffer rising losses.

"You can think of the credit cycle in three pieces: the wholesale securities piece, the consumer piece and the commercial real estate piece. As a relative matter, we have less exposure in the third area," Gerspach said.