Citigroup, the largest U.S. bank by market value, said Monday its third-quarter net income will drop 60% on losses and writedowns stemming from subprime and leveraged loan woes, fixed income trading, as well as weakness in its consumer business.
The profit warning came on the same day that Swiss bank UBS, the world's largest wealth manager, unveiled $3.4 billion in losses driven by some of the same factors and raised questions about whether other banks which have not yet reported third-quarter results will also warn.
Citi shares were up 1.8% at $47.51 despite the warning, after Charles Prince, the bank's embattled chief executive, said he expected the bank "to return to a normal earnings environment in the fourth quarter."
Analysts said they were betting that like weaker results last month at investment banks like Goldman Sachs and Lehman Brothers , Citi's stumble could be a one-off thing.
"I think the market is looking past this third-quarter number really and banking on the notion that credit conditions have improved and that this is really a one-time hit," said Bill Fitzpatrick, an analyst at Johnson Asset Management.
"If we return to more normal conditions, Citigroup should be back to business as usual here in the very near future."
Prince said the decline had been driven "by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."
Among the principal culprits for the warning were $1.4 billion in pre-tax write-downs on loan commitments to unrated or junk-rated companies, known as leveraged loans.
Citi also said it was taking $1.3 billion in pretax losses on the value of leveraged loans and subprime mortgage bonds it had planned to repackage into bonds called collateralized debt obligations.
But Citi acknowledged that its performance was disappointing even considering the market turmoil.
"As is evident, the market disruption had a severe impact on our results in markets and banking," Chief Financial Officer Gary Crittenden said in a recorded call. "However our performance was below expectations even taking into account turbulent market conditions."
The profit warning is likely to put renewed pressure on Prince, who this week marks his fourth anniversary at the helm of the banking group and who has in the past been criticized by some shareholders for its share underperformance and cost growth outpacing profit increases.
"The speculation had been that Prince was under pressure to get Citi back together sooner rather than later," said David Katz, chief investment officer at Matrix Asset Advisors in New York. "This puts a lot of attention on him."
Prince made headlines in July when, asked by the Financial Times newspaper about the possibility of a retreat from the leveraged loan markets, said the bank was "still dancing."
The bad news for Citi was not restricted to leveraged loans and subprime. The bank also said its consumer division would see a $2.6 billion increase in credit costs "with approximately one-quarter of the increase driven by higher net credit losses and approximately three-quarters driven by higher charges to increase loan loss reserves."
"Our reserves will continue to reflect the economic environment, credit performance in our portfolio and portfolio growth," he said.
Citi shares are down about 16% so far this year, compared with a 9.8% decline in the Philadelphia KBW Bank Index.