Citigroup says quarterly profit to plunge
NEW YORK (Reuters) - Citigroup Inc (C.N), the largest U.S. bank by market value, said on Monday its quarterly earnings will drop 60 percent on $5.9 billion in losses and write-downs from subprime and leveraged loan woes, fixed income trading, as well as weakness in its consumer business.
The profit warning came on the same day that Swiss bank UBS AG (UBSN.VX) disclosed $3.4 billion in losses, driven by some of the same factors, and raised questions about whether other banks that have not yet reported third-quarter results will also warn.
Citigroup shares were up 2.4 percent despite the warning, after Charles Prince, the bank's embattled chief executive, said he expected the bank "to return to a normal earnings environment in the fourth quarter."
Analysts said they were betting that, like weaker results last month at investment banks including Goldman Sachs & Co. (GS.N) and Lehman Brothers LEH.N, Citi's stumble could be a one-time thing.
"I think the market is looking past this third-quarter number, really, and banking on the notion that credit conditions have improved and that this is really a one-time hit," said Bill Fitzpatrick, an analyst at Johnson Asset Management. "If we return to more normal conditions, Citigroup should be back to business as usual here in the very near future."
Prince said the decline had been driven "by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."
Among the principal culprits for the warning were $1.4 billion in pre-tax write-downs on loan commitments to unrated or junk-rated companies, known as leveraged loans.
Citi also said it was taking $1.3 billion in pretax losses on the value of leveraged loans and subprime mortgage bonds it had planned to repackage into bonds called collateralized debt obligations.
And the bank had $600 million in losses on fixed-income trading, which Prince blamed on "significant market volatility and a breakdown in pricing relationships."
'BELOW EXPECTATIONS'
Citi acknowledged that its performance was disappointing, even considering the market turmoil.
"As is evident, the market disruption had a severe impact on our results in markets and banking," Chief Financial Officer Gary Crittenden said in a recorded call. "However, our performance was below expectations even taking into account turbulent market conditions."
The profit warning may put renewed pressure on Prince, who this week marks his fourth anniversary at the helm of the banking group and who has been criticized by some shareholders for Citi's share underperformance and for growth in costs that has outpaced profit increases.
One prominent analyst, Mike Mayo, called for Prince to step down, and others said investors were hoping he would go.
"The only reason the shares are up is people are betting this guy (Prince) is gone," said William Smith, chief executive of SAM Advisors LLC, which owns Citigroup stock.
Prince made headlines in July when, asked by the Financial Times newspaper about the possibility of a retreat from the leveraged loan markets, said the bank was "still dancing."
Citi declined to comment on Mayo's call for Prince's departure. A source close to the bank said Prince had fully reviewed and vetted its third-quarter results with the board of directors.
Other analysts said it was unfair to blame Prince for what amounted to cyclical factors that probably hit every bank to a greater or lesser degree.
A Goldman Sachs analyst warned last week that Merrill Lynch & Co Inc MER.N, for example, faces a $1.5 billion third-quarter loss on its fixed-income business, driven by $4 billion in asset write-downs connected to leveraged loans and mortgages.
The bad news for Citi was not restricted to leveraged loans and subprime. The bank also said its consumer division would see a $2.6 billion increase in credit costs stemming from behavioral patterns suggesting increased loan losses, worsening macroeconomic indicators, and higher mortgage delinquencies
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Citi shares were up $1.12 to $47.79 in midday trade on the New York Stock Exchange. The shares are down about 15 percent so far this year, compared with an 8.6 percent decline in the Philadelphia KBW Bank Index .BKX.
(Additional reporting by Chris Reiter, Mark McSherry, Jonathan Keehner, Caroline Valetkevitch and Dan Wilchins)
