At Citigroup, A Big Loss Is Only Part of The Story


When Citigroup reports what is expected to be its second straight giant quarterly loss April 18, the actual numbers may be almost secondary.

Mark Lennihan

Ten years after Sanford "Sandy" Weill created what he thought would be a global banking colossus, Citigroup has instead turned inward, looking for more businesses to shed, costs to cut and infrastructure to tighten.

Analysts on average expect the bank to report a first- quarter loss of 95 cents per share, according to Reuters Estimates. That would follow a loss the prior quarter of $9.83 billion, or $1.99 per share.

The difficulty New York-based Citigroup has had navigating the global credit crisis has taken a toll on its stock.

Through Wednesday, Citigroup stock had fallen 55 percent in the last year, giving the bank a market value of roughly $119 billion based on reported shares. Its $23.58 share price was barely above its year-end book value of $22.74 per share. The shares bottomed at $18 on March 17.

Investors want signs that Citigroup has control of its future losses and can estimate their extent and duration. They also seek new Chief Executive Vikram Pandit's vision for where he wants the largest U.S. bank by assets to be when it grows up.

"They're moving in the right direction, by divesting non- core assets, right-sizing the company and freeing up liquidity," said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which owns Citigroup shares. "We want to see a more concrete plan." Even bond investors have shown caution.

Last week, Citigroup sold $4.5 billion of five-year notes yielding 3 percentage points more than U.S. Treasuries. That spread is what investors demanded to take on the risk of owning Citigroup debt, rated in the high, "double-A" category.

Tale of 2 Citis

Six months and more than $20 billion of write-downs earlier, Citigroup had sold $3 billion of five-year notes. The spread then was just 0.98 of a percentage point.

Intensive Care

Pandit became chief executive in December. He replaced Weill's handpicked successor, Charles Prince, who had resigned under pressure the previous month.

Since taking over, Pandit has traveled the globe to identify businesses that can generate and sustain higher returns. He has reorganized several operations and overseen some 6,200 job cuts, with thousands more expected.

Pandit has also shuffled management, installing several former colleagues at Morgan Stanley , where he was chief operating officer of institutional securities and investment banking.

Citigroup has also raised more than $30 billion of capital from November to January and cut its dividend 41 percent.

"The patient remains in intensive care, but there are some signs the surgery being done is having some positive impact," said Marshall Front, who oversees $700 million at Front Barnett Associates in Chicago, which owns about 450,000 Citigroup shares. "When does he go back to his room, or leave the hospital? You don't know. But I think we've passed the low."

Lenders worldwide have already written off well over $200 billion tied to the credit crisis, including $19 billion last week by Swiss bank UBS .

Vikram Pandit

And many of Citigroup's immediate financial problems had their origins prior to Pandit's joining the bank last year.

Sad Story

Lehman Brothers analyst Jason Goldberg on Thursday projected a 50 cents-per-share quarterly loss, with close to $10 billion of write-downs. Some analysts expect more.

But Goldberg wrote that U.S. consumer credit may show "marked deterioration." He said the total loss could rise if the bank proves "more aggressive" on write-downs, or adds more to loan loss reserves than expected.

And he identified plenty of exposures: $47 billion tied to "structured investment vehicles," $43 billion of leveraged loans to fund corporate buyouts, $29 billion of "super-senior" collateralized debt obligations, $24 billion of subprime mortgages, $21 billion of home equity loans with high loan-to- value ratios, $20 billion of commercial real estate trading assets and $4 billion tied to "monoline" insurers.

John Reed, who combined Citicorp with Weill's Travelers Group to create Citigroup, but left in 2000 after clashing with Weill, in a Financial Times interview last week called the merger a "mistake" and the bank a "sad story."

It is Pandit's job to change that.

"Pandit needs to show investors what the company will look like in a couple of years," Armbruster said. "Wall Street loves progress. If it can see incremental progress, it will afford Citigroup a higher valuation."