Citigroup Profit Falls 57%, Hurt by Subprime Losses

Citigroup said Monday third-quarter profit fell 57 percent, its biggest decline in three years, as the largest U.S. bank absorbed losses in subprime and leveraged loans, fixed-income trading and its U.S. consumer business.

Mark Lennihan

Net income fell to $2.38 billion, or 47 cents per share, from $5.51 billion, or $1.10, a year earlier.

Revenue rose 6 percent to $22.66 billion, while operating expenses increased 22 percent to $14.56 billion.

Analysts on average expected profit of 43 cents per share on revenue of $20.81 billion, according to Reuters Estimates.

Return on equity was 7.4 percent.

New York-based Citigroup had on Oct. 1 projected a 60 percent drop in profit.

Results add to pressure on Chairman and Chief Executive Charles Prince, who is trying to boost a stock that has risen just 5 percent since he took over four years ago. Although he has received public support from Citigroup directors, many investors and analysts have said more changes are needed.

"The quarter reflected shortfalls across businesses and oversight areas (management of rates, risk, and expenses) in a year of 'no excuses,"' wrote Deutsche Bank Securities Inc. analyst Michael Mayo, referring to a prior statement by Prince.

"We still wonder what if any repercussions there will be at the Office of the Chairman," said Mayo, who on Friday downgraded Citigroup to "sell" from "buy."

Chief Financial Officer Gary Crittenden said Citi would suspend stock buybacks until it could rebuild its capital levels.

In the bank's third quarter, Tier 1 capital levels fell to 7.4 percent, which is just above the company's 7 percent goal, reflecting the impact of recent acquisitions as well as damage caused by turbulent debt and stock markets this summer. Return on common equity plunged to 7.4 percent from 18.9 percent a year ago.

Results included pre-tax writedowns of $1.35 billion for leveraged loans, $1.56 billion for subprime mortgages, and $636 million from fixed income trading.

They also included a $729 million from the sale of shares in Brazilian credit card processor Redecard.

Credit costs increased $2.98 billion, including a $780 million increase in net credit losses and a $2.24 billion charge to boost reserves for bad loans. Delinquencies on second mortgages nearly doubled last quarter.

"We're at the beginning of a worsening credit environment, so the question is how much of the big charge is one-time, and how much is ongoing," said Lee Norton, an analyst at JS Asset Management in West Conshohocken, Pa.

Other banks have also reported or projected losses from leveraged loans, mortgages, trading or a mix of factors, including Bank of America , Deutsche Bank, Merrill Lynch , UBS and Washington Mutual .

Citigroup shares closed Friday at $47.87 on the New York Stock Exchange. Through Friday, the shares were down 14 percent this year, while the Philadelphia KBW Bank Index was down 8 percent. Shares rose nearly 1 percent in premarket trading Monday.

Consumer Unit Shows Weakness

Corporate and investment banking profit sank 74 percent to $446 million, hurt by the subprime and trading exposures.

On Thursday, Citigroup announced the departure of trading chief Thomas Maheras and co-head of fixed income Randy Barker, and elevating Vikram Pandit to oversee investment banking, trading and alternative investments.

Profit in consumer banking, Citigroup's largest business, fell 44 percent to $1.78 billion, including declines of 55 percent in the United States and 15 percent internationally.

Consumer revenue rose 14 percent to $14.68 billion, but was little changed in the United States.

Wealth management profit, including the Smith Barney brokerage and private bank, rose 23 percent to $489 million.

Alternative investments generated a $67 million loss, hurt by lower revenue from investments.

Prince this year announced 17,000 job cuts as part of a plan to save $4.58 billion a year by 2009.

Citigroup ended September with $2.35 trillion of assets.