June 19, 2008 / 4:24 PM / in 10 years

Citi CFO sees subprime pain easing, but still high

NEW YORK (Reuters) - Citigroup Inc could take substantial write-downs in the second quarter, the company’s chief financial officer said on Thursday, raising concern the bank’s second-quarter earnings would be weaker than expected.

CFO Gary Crittenden told investors on a conference call that many asset write-downs in the second quarter would be smaller than those in the first quarter, when it took a total of $16 billion in credit losses and charges.

But they could still be large, Crittenden said, showing investors that the credit crunch is hardly over. Citi’s shares fell as much as 4.9 percent, pulling down banking stocks and briefly the broader U.S. stock market. The cost of protecting Citi’s debt against default rose.

“You may be past the worst of the write-downs, but you’re not past all of them, and they can still be big,” said Jim Huguet, co-chief executive at Great Companies, a fund manager that does not own Citi shares.

Citi expects to write down assets linked to subprime mortgages and loans that finance leveraged buyouts, Crittenden said. The write-downs, which totaled about $9 billion in the first quarter, are not on track to be as big this quarter, but could still be substantial, he said.

Forecasting the likely magnitude of any write-down is difficult because the quarter is not yet over, he added.

The bank’s exposure to bond insurers could trigger another $1.5 billion write-down, similar to the first-quarter charge in that area, Crittenden said.

Citi also faces a potential charge from the rising value of its liabilities, Crittenden said.

Credit charges from consumer lending could continue to rise all year, he said.

“This quarter will still have some of the same challenges that we had in the prior quarter, but it will also ... represent sequential improvement over the prior quarter,” Crittenden said.

The timing of the statements suggested to investors that Citi’s results, expected to be released on July 18, will be worse than expected.

“This was a kind of a warning that Wall Street may not be fully aware of the magnitude of the write-downs coming next month,” said Marshall Front, chairman at Front Barnett Associates, which owns Citi shares.

Analysts, on average, expect Citi to earn 34 cents a share before items in the second quarter, according to Reuters Estimates.

GLOBAL ISSUE

Financial institutions globally have written down more than $400 billion in assets amid the credit crunch. Three U.S. investment banks reported weak results this week, most notably Lehman Brothers Holdings Inc which posted its first quarterly loss as a public company.

Crittenden’s comments, on a conference call hosted by Deutsche Bank, came after Citi said it agreed to buy Brazilian brokerage Intra.

Crittenden said Citi is always willing to look at acquisitions, and will make them when they make sense, but is focusing more on improving its performance.

“One of the great things about the company is we don’t need to buy anybody,” Crittenden said.

Recently appointed Chief Executive Vikram Pandit has been trying to revive the bank, which has long underperformed its main rivals.

Pandit’s strategy includes shedding $400 billion in assets within three years and boosting revenue by up to 10 percent annually.

Citi’s shares closed down 23 cents to $20.17 on the New York Stock Exchange on Thursday after dropping as low as $19.41. The company’s shares have fallen more than 60 percent over the last year, while the KBW Bank index has fallen about 45 percent.

Additional reporting by Christian Plumb; Editing by Maureen Bavdek/Jeffrey Benkoe

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