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Citigroup Inc., the biggest U.S. bank, said third-quarter earnings fell 57 percent and predicted that mortgage delinquencies and consumer lending will deteriorate for the rest of the year.
Citigroup had its biggest drop in a month in New York trading after the company said in a statement that net income declined to $2.38 billion, or 47 cents a share, from $5.51 billion, or $1.10, a year earlier.
Chief Financial Officer Gary Crittenden said on a conference call that late payments on home loans were higher than expected and may worsen in the fourth quarter. Chief Executive Officer Charles Prince, who has overseen a 16 percent drop in the company's stock this year, said momentum ``continues very strong'' in most of the company's businesses.
``They certainly had a lot of troubles and to some extent have been tripping over themselves the last couple of years,'' Jeffery Harte, an analyst at Sandler O'Neill & Partners LP in Chicago, said in an interview. Prince is ``doing the right things strategically. It's become more of an execution problem latoldy.''
Citigroup fell $1.05 to $46.82 in composite trading on the New York Stock Exchange at 10:44 a.m., after sinking as far as $46.61. The company said it won't buy back shares until its capital ratios improve.
Earnings included a $729 million pretax gain on the sale of shares of Redecard SA, MasterCard Inc.'s transaction processor in Brazil. Revenue climbed 5.8 percent to $22.7 billion.
Return on Equity
Return on equity, a gauge of how effectively the company reinvests earnings, dropped to 7.4 percent from 18.9 percent a year earlier, making it the second-lowest among Wall Street firms that have reported earnings. The lowest was Bear Stearns Cos., at 5.3 percent. Goldman Sachs Group Inc.'s 31.6 percent was the highest.
Citigroup is the first of the nation's biggest banks to report earnings for the quarter. New York-based JPMorgan Chase & Co. releases its results on Oct. 17, and Bank of America Corp., based in Charlotte, North Carolina, is scheduled for Oct. 18.
Profit exceeded analysts' estimates of 44 cents a share, according to a Bloomberg survey. The company told investors on Oct. 1 that third-quarter earnings dropped 60 percent.
Citigroup's investment bank earned $446 million in the third quarter, a 74 percent drop from a year earlier. Profit from consumer banking fell 44 percent to $1.78 billion. Global wealth management earnings rose 23 percent to $489 million. The bank lost $67 million in its alternative-investments unit, compared with profit of $117 million in the third quarter of 2006.
Better Revenue
``Their revenues actually weren't as bad as we were expecting,'' Harte said. ``The trading and some of the banking businesses held up better than we thought.''
Revenue in Citigroup's trading and investment-banking division was $4.6 billion, compared with Harte's estimate of $3.75 billion. Revenue from wealth management, including the company's Smith Barney retail brokerage, was $3.51 billion. Harte had predicted $3.25 billion.
Citigroup replaced Thomas Maheras, 44, who ran trading, and Randy Barker, 48, a senior fixed-income executive, and promoted Vikram Pandit, 50, last week to run trading, investment banking and alternative investments.
The board is ``comfortable'' with the management changes, Prince said on the call.
The shakeup followed writedowns of $1.35 billion for leveraged-buyout loans and $1.56 billion for subprime mortgage assets. Citigroup also suffered a $636 million fixed-income trading loss and reported $2.98 billion of costs to guard against rising defaults for consumer loans. The losses and writedowns announced today were $600 million bigger than the company estimated two weeks ago.
Losses an `Aberration'
Prince, 57, said when the losses were announced that they were an ``aberration'' and that profit would ``return to a normal earnings environment'' in the fourth quarter. Citigroup is part of a group of banks that agreed to set up a fund of about $80 billion to revive the market for asset-backed commercial paper, or loans that mature in 270 days or less.
``This quarter's performance was well below our expectations and frankly surprising,'' Prince said on a conference call with analysts. ``We are working very hard to make sure our return to strong performance is something we can be confident in.''
Citigroup may get a boost from last month's interest-rate cut by the Federal Reserve. The 0.5 percentage-point reduction in the central bank's target for overnight loans between banks will trim borrowing costs and help increase earnings per share by about 6 percent in 2008, CreditSights Inc. analyst David Hendler estimated in an Oct. 2 report.
Bank of America
Citigroup has dropped 14 percent this year in New York trading, compared with the 2.5 percent decline of Bank of America, the second-biggest U.S. bank, and the 3.1 percent slide of No. 3 JPMorgan Chase.
The stock's slide has fueled criticism from investors such as Second Curve Capital LLC's Thomas Brown. Prince came under fire last year from Saudi billionaire Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, for failing to control costs.
Prince placated Alwaleed by pledging earlier this year to cut annual expenses by $4.6 billion, or 10 percent, by 2009. The CEO announced plans in April to eliminate 17,000 jobs. Alwaleed said this month that he supports Prince.
Crittenden, the CFO, said on the conference call that the company is ``ahead of our commitment'' on headcount reductions and expense savings.
Rating Cut
Deutsche Bank analyst Michael Mayo cut his investment recommendation on Citigroup to ``sell'' on Oct. 12, and said the company's inability to increase revenue faster than expenses in the third quarter indicates that Prince may fall short of his pledge to cut costs.
``We're a ways away from seeing any real pressure for his ouster,'' said Frank Braden, an equity analyst at Standard & Poor's in New York who rates Citigroup ``strong buy.'' ``It'll take a couple more quarters of results like this before people say that maybe it's getting away from him, and it's more than just this crisis.''
Prince's predecessor, Sanford Weill, built the company through acquisitions over 17 years, climaxing with Travelers Group Inc.'s $36 billion takeover of Citicorp in 1998. In regulatory filings, the bank says it has about 200 million customer accounts in more than 100 countries.
Since taking over in October 2003, Prince has defended the company's breadth as helping to assure stable earnings. He also has made more than $16 billion of acquisitions since April 2006, when the Fed lifted a 13-month ban on deals.
Citigroup agreed this month to pay $4.6 billion for full control of Nikko Cordial Corp., Japan's third-biggest brokerage, and bought electronic broker Automated Trading Desk LLC for $680 million.
``Prince has been dealt a tough hand,'' said Michael Chren, a portfolio manager at Allegiant Asset Management Co., which oversees about 1 million Citigroup shares. ``He's doing the best job he can, and I think at this point you have to give him the benefit of the doubt.'' |
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