NEW YORK (Reuters) - Citigroup Inc (C.N) said on Monday that third-quarter profit fell 57 percent as losses mounted from subprime and leveraged loans, fixed-income trading and its U.S. consumer business.
The profit decline was the largest in three years for the No. 1 U.S. bank, and reflected $6.5 billion of pretax losses and write-downs, $600 million more than it estimated on October 1.
“This quarter’s performance was well below our expectations, and frankly surprising,” Chief Executive Charles Prince said on a conference call. He said some credit and trading losses “simply reflect poor performance.”
Results renewed speculation about the job security of Prince, who in his fifth year has failed to consistently boost revenue faster than costs.
The New York-based bank also did not repeat prior comments suggesting a rosier outlook for the fourth quarter, rekindling fears that the global credit crunch won’t be resolved soon.
News that Citigroup, Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) are planning a fund to avoid a fire sale of billions of dollars of bonds linked to subprime home loans and other debt nN15335944 also weighed on the market.
Shares of Citigroup, a Dow Jones industrial average .DJI component, closed down $1.63, or 3.4 percent, at $46.24. The Dow fell 0.8 percent.
Net income at Citigroup fell to $2.38 billion, or 47 cents per share, from $5.51 billion, or $1.10, a year earlier.
Revenue rose 6 percent to $22.66 billion while operating costs rose 22 percent to $14.56 billion.
Excluding acquisitions and a $729 million gain from selling shares in Brazil credit card processor Redecard SA RDCD3.SA, revenue fell 3 percent to $20.84 billion. Return on equity fell to 7.4 percent from 18.9 percent.
Analysts on average expected profit of 43 cents per share on revenue of $20.81 billion, according to Reuters Estimates. Citigroup had on October 1 projected a 60 percent drop in profit.
“If corporate credit goes the way of consumer credit, Citigroup is going to have some big problems,” said Jaime Peters, a banking analyst at Morningstar Inc. in Chicago.
Chief Financial Officer Gary Crittenden said U.S. consumer credit should weaken this quarter after mortgage delinquencies accelerated, and that for some fixed-income products, “we’re not optimistic that they will regain a foothold.”
He also said the bank likely won’t buy back stock until early next year as it shores up capital levels.
Citigroup reported pretax write-downs of $1.35 billion for leveraged loans, $1.56 billion for subprime mortgages and other debt, and $636 million from fixed income trading.
It also reported a $2.98 billion increase in credit costs, including $780 million for net credit losses and $2.2 billion to boost reserves for bad loans.
Bank of America and JPMorgan report results this week and have significant consumer and leveraged loan operations. Neither has estimated potential write-downs or losses.
Other banks have also projected losses from leveraged loans, mortgages, trading or a combination, including Deutsche Bank AG (DBKGn.DE), Merrill Lynch & Co MER.N, UBS AG UBSN.VX and Washington Mutual Inc (WM.N).
At Citigroup, profit in consumer banking fell 44 percent to $1.78 billion, including declines of 55 percent in the United States and 15 percent internationally.
Revenue rose 14 percent to $14.68 billion, but was little changed in the United States.
“We’re at the beginning of a worsening credit environment, so the question is how much of the big charge is one-time, and how much is ongoing,” said Lee Norton, an analyst at JS Asset Management LLC in West Conshohocken, Pennsylvania.
In an interview, Crittenden said that excluding the losses and write-downs, quarterly revenue growth lagged expense growth from a year earlier, when Citigroup had “an extraordinarily low level of expenses.”
He said the bank is on course to save $4.58 billion a year by 2009, in part through the elimination of 17,000 jobs.
Despite the losses and “aberrational” fixed-income results, Prince said several businesses performed well, and that “any fair-minded person would say the strategic plan is working.”
Prince overhauled management at the investment bank, where profit sank 74 percent to $446 million.
Trading chief Thomas Maheras and co-head of fixed income Randy Barker departed, and Vikram Pandit was promoted to run investment banking, trading and alternative investments.
Responding to analysts, including Deutsche Bank’s Michael Mayo, who have called for changes in top management, Prince said the board was “comfortable” with the changes.
Citigroup shares are up just 2 percent, excluding dividends, since Prince became chief executive in 2003. They are down 17 percent this year, while the Philadelphia KBW Bank Index .BKX is down 10 percent.
Crittenden said Citigroup ended September with exposure to $57 billion of leveraged loans, but that trading activity had become “fairly normalized” during September. He also said the pipeline of merger activity was at a record level.
Nomura Holdings (8604.T), Japan’s largest brokerage, on Monday said it will quit the U.S. residential mortgage-backed securities market and cut one-fourth of its U.S. work force.
Wealth management profit, including the Smith Barney brokerage, rose 23 percent to $489 million. Alternative investments, run by Pandit, generated a $67 million loss.
Citigroup ended September with $2.35 trillion of assets.
Additional reporting by Joseph A. Giannone, Tim McLaughlin and Dan Wilchins