Citigroup $2.5 billion loss soothes investors

NEW YORK (Reuters) - Citigroup Inc (C.N) posted a smaller-than-expected quarterly loss, despite $11.7 billion of write-downs and credit losses tied to deteriorating capital markets and a slumping economy.

Though the second-quarter loss totaled $2.5 billion, the results soothed investors, who pushed shares of the largest U.S. bank by assets up $1.53, or 8.5 percent, to $19.50 in afternoon trading on the New York Stock Exchange.

Citigroup shares, part of the Dow Jones industrial average .DJI, had bottomed Tuesday at $14.01, the lowest since the bank was created in a 1998 merger.

Investors have long sought signs that the New York-based bank, one of the hardest hit in the year-long global credit crisis, may finally be ready to turn a corner.

"Concerns of an imminent capital shortfall have abated," wrote Mike Mayo, a Deutsche Bank Securities Inc analyst. He upgraded Citigroup to "hold" from "sell" but expressed concern about future write-downs and "still negative" credit trends.

Citigroup's net loss totaled 54 cents per share, and was the bank's third straight quarterly loss. It compared with a year-earlier profit of $6.23 billion, or $1.24 per share.

The operating loss was $2.22 billion, or 49 cents per share, as revenue declined 29 percent to $18.65 billion. On that basis, analysts on average had expected a loss of 67 cents per share on revenue of $17.44 billion, Reuters Estimates said.

"All things considered, it was a decent quarter," wrote William Tanona, an analyst at Goldman Sachs & Co.

Citigroup's report followed surprisingly strong profits this week from JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), and a much larger-than-expected $4.9 billion quarterly loss at Merrill Lynch & Co MER.N.

Other major lenders report quarterly results next week. Analysts expect Bank of America Corp (BAC.N) on Monday to say profit fell by more than half, and Wachovia Corp WB.N and Washington Mutual Inc (WM.N) on Tuesday to post big losses.

NOT HAPPILY EVER EVER

Citigroup ended the quarter with 363,000 employees after eliminating 6,000 jobs since March. It has cut 14,000 jobs this year, including in July.

The bank aims to keep cutting jobs at a similar rate, as Chief Executive Vikram Pandit tries to shed $400 billion of risky or underperforming assets, and within three years slash $15 billion of costs.

"While there is still much to do, we are encouraged by our progress," Pandit said in a statement.

Results softened the market impact of Thursday earnings disappointments at Merrill, Google Inc (GOOG.O) and Microsoft Corp (MSFT.O). The dollar strengthened, and the yield on the 10-year U.S. Treasury note US10YT=RR rose above 4 percent.

Citigroup has lost about $17.4 billion in the last three quarters, and incurred more than $58 billion of write-downs and increased credit costs since the middle of 2007.

"Pandit seems to be doing the right things and is starting to build a base," said Jonathan Monk, senior portfolio manager at Aerion Fund Management in London.

Citigroup's $7.2 billion of write-downs at its securities and banking unit included $3.5 billion from subprime mortgages, $2.4 billion for bond insurers and smaller amounts from "Alt-A" mortgages, commercial real estate and leveraged finance.

"The worst may be over in the subprime mess," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. "There appears to be a bandage on the wound."

Citigroup said it also increased credit costs by $4.5 billion, mainly for its U.S. consumer banking and global credit card businesses.

Chief Financial Officer Gary Crittenden on a conference call said North American credit card losses could exceed historical peaks, and consumer credit costs might have a "meaningful" impact on results for the rest of the year.

"Citi is exposed to every aspect of the economy," said Matt McCormick, an analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "It's not like the movies where all of a sudden you say, 'And they all lived happily ever after.'"

LOWERING RISK

Pandit has cut Citigroup's dividend 41 percent and helped raise more than $40 billion of capital.

This has helped boost the bank's Tier-1 capital ratio, measuring its ability to cover losses, to 8.7 percent from 7.12 percent at year end. Regulators consider 6 percent sufficient.

Last week, Pandit agreed to sell Citigroup's German consumer banking business to France's Credit Mutuel Group for roughly $8 billion, resulting in an expected $4 billion gain.

Citigroup ended June with $2.1 trillion of assets, down from $2.36 trillion at the end of September.

"This is no easy fix, even for the best of managers," wrote Credit Suisse analyst Susan Roth Katzke.

In the quarter, Citigroup's investment bank lost $2.04 billion, while consumer banking suffered a $700 million loss. Credit card profit declined 56 percent to $467 million, and wealth management profit fell 21 percent to $405 million.

The bank said it has reduced the size of its portfolio of so-called super-senior, asset-backed securities collateralized debt obligations by about two-thirds to $18.1 billion.

"We've made progress," Crittenden said in an interview. "That doesn't mean further write-downs aren't possible, but it does mean the portfolio is substantially less risky."

Pandit became chief executive in December, replacing Charles Prince, who resigned under pressure the prior month.

Through Thursday, Citigroup shares had fallen 39 percent this year. The KBW Bank Index .BKX was down 30 percent.

(Additional reporting by Dan Burns and Ellis Mnyandu in New York and Sitaraman Shankar in London; Editing by Gerald E. McCormick, Derek Caney, Dave Zimmerman)