Citigroup Posts $2.8 Billion Loss

11/16/2008 05:12 am ET | Updated May 25, 2011

NEW YORK — Citigroup Inc., suffering its fourth straight quarterly loss and forfeiting the title of largest U.S. bank by assets, is falling behind in the historic reshuffling of the U.S. banking system.

Of the four major U.S. banks left standing _ Citigroup, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. _ Citi has been on the shakiest footing for a while. Its peers have managed to keep turning profits, albeit dampened ones, and they've made acquisitions while Citi has shrunk.

Many observers believe now is the time for banking companies to snap up low-priced rivals to better position themselves in advance of an eventual economic turnaround.

But Thursday's results heightened concerns that Citi _ drubbed by the relentless downturn in housing and turmoil in the financial markets _ may not be the capable acquirer it hopes to be.

"I personally don't think they can do it (an acquisition) unless it's really on the cheap," said Donn Vickrey, co-founder of Gradient Analytics, pointing to Citi's recent losses and losses that appear to be in the pipeline. "To me, this looks pretty concerning."

The New York-based bank said Thursday it lost $2.8 billion, or 60 cents per share, in the third quarter, compared with a profit of $2.2 billion, or 44 cents per share, a year ago. The deficit for the July-to-September period brings Citi's total losses over the past 12 months to $20.2 billion.

The shortfall for the quarter was narrower than anticipated. Analysts polled by Thomson Reuters expected a loss of 70 cents per share; Standard & Poor's Ratings Services called the results "disappointing, but not entirely unexpected."

The results were hardly reassuring, though. Citi wrote down $4.4 billion in investments, plus another $612 million from a settlement related to auction-rate securities; recorded $4.9 billion in credit losses; and took a $3.9 billion charge to boost reserves. The bank has written down the value of investments tied to souring mortgages and other bad debt by some $51 billion since this time last year _ the most of any other bank.

Vickrey pointed out that on Citigroup's balance sheet, the "accumulated other comprehensive loss" in stockholders' equity increased by about $6 billion during the third quarter. An "accumulated other comprehensive loss" measures a loss in a business that has yet to be realized, suggesting Citi may take more hits in future quarters.

Citigroup shares fell 33 cents, or 2 percent, to close Thursday at $15.90.

The frailty of the financial system has led the government to pledge $250 billion worth of stakes in private banks, including Citigroup, to bolster their capital base. That, officials hope, will boost the institutions' ability to lend and loosen up the tight credit markets. However, banks could also put the investment toward acquisitions.

Chief Financial Officer Gary Crittenden indicated that Citigroup is still on the prowl, particularly after it gets its $25 billion portion from the government. The stake presents "the possibility of our taking advantage of opportunities that otherwise might have been more closed to us," he said during a conference call with investors.

Citi earlier this month lost a bid to Wells Fargo for Wachovia Corp. and its massive deposit base. The government also considered Citi, among other suitors, to buy the banking assets of the failed thrift Washington Mutual Inc., which got snapped up by JPMorgan. Crittenden said on the conference call that Citi considered a third buy as well, but didn't disclose the target.

"With Wachovia out of the picture, there is no doubt that Citigroup will pursue another acquisition," wrote Isabel Schauerte, an analyst with the research and consulting firm Celent, in a note. "However, if anything, these results suggest that the bank should focus on repairing its troubled balance sheet while waiting for another buying opportunity that has the scale Citi is hungry for."

In an interview with The Associated Press, Crittenden said that when it comes to acquisitions, "we would continue to look, and see, obviously, what happens. But it would need to meet some pretty strict criteria." He added that the bank's primary strategy is to grow outside the U.S.

With $2.05 trillion in total assets now, Citigroup has officially become the second-largest bank by assets behind JPMorgan Chase's $2.25 trillion. Bank of America currently has $1.91 trillion in assets, and will have more when it completes its buyout of Merrill Lynch, which on Thursday reported a $5.2 billion loss. Wells Fargo has assets of $622 billion ahead of its acquisition of Wachovia Corp.

Citi eliminated 11,000 jobs during the third quarter, bringing its total headcount reduction so far this year to 23,000. About 9,000 more job cuts are due in the coming quarters, Crittenden said, plus 12,500 eliminated jobs when Citi completes its sale of Citi Global Services and another 5,600 when it closes its sale of its German retail banking business.

In the fourth quarter of 2007, Citigroup's headcount was 375,000. Now, it's at 352,000, Crittenden said.

Citi also shed $50 billion in assets over the past three months. CEO Vikram Pandit announced in May that Citi intends to rid itself of nearly $500 billion in assets to get out of businesses such as risky mortgages; the bank said that over the past year, it has lopped off $308 billion in total assets.

On the positive side, Citigroup's write-downs were smaller than in the second quarter. Expenses were down $1.2 billion compared with the previous quarter and the bank maintained a Tier 1 capital ratio of 8.2 percent. A Tier 1 capital ratio essentially measures equity against risky assets. Citi's ratio is considered strong by historical measures, and is expected to tick higher when the government takes its stake.

But as JPMorgan's and Wells Fargo's third-quarter reports illustrated on Wednesday, the credit environment, particularly when it comes to consumers, is worsening.

During the conference call, Crittenden said that if the unemployment rate keeps rising above 6 percent and the economy keeps slowing, there will be negative consequences _ "that card losses could exceed their historical peaks, and that mortgage losses could continue to grow."

The bank is preparing for the unemployment rate to reach between 7 and 9 percent, he said.

In North America, more credit card holders became delinquent and more had to be written off, Citi said. The credit loss rate jumped to 7.3 percent from 6.46 percent in the second quarter and from 4.37 percent a year ago. Credit card loss rates worsened in Latin America and Asia, too.

Citigroup also said defaults in residential real estate loans, notably first mortgages, increased.

As the bank tightened its lending standards, average loans to consumers grew by a mere 1 percent year from a year earlier, while corporate loans were down 15 percent.

"We are very focused on client profitability," Crittenden said.